UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Sonic Foundry, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
[LOGO] sonicfoundry(R)
mediasolutions
SONIC FOUNDRY, INC.
1617 Sherman Avenue
Madison, Wisconsin 53704
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held July _, 2003
The Annual Meeting of Stockholders of SONIC FOUNDRY, INC., a Maryland
corporation ("Sonic") will be held at the Monona Terrace Community and
Convention Center, One John Nolen Drive, Madison, Wisconsin 53703 on July _,
2003 at 9:00 a.m. local time, for the following purposes:
1. To consider and vote on a proposal to approve (A) the Amended and Restated
Asset Purchase Agreement, dated as of June 6, 2003 and effective as of May
2, 2003 (the "Amended and Restated Asset Purchase Agreement"), by and
between SP Acquisition Company, a corporation formed under the laws of
Delaware ("SPA") and an indirect wholly-owned subsidiary of Sony Pictures
Digital Inc., a Delaware corporation ("SPD"), and Sonic; and (B) the sale
of the Desktop Software Business of Sonic as contemplated by the Amended
and Restated Asset Purchase Agreement (the "Proposed Transaction") which
constitutes a sale of substantially all of the assets of Sonic pursuant to
Maryland General Corporation Law ("MGCL");
2. To approve an amendment of Sonic's charter upon the determination by
Sonic's Board of Directors to approve a reverse stock split of Sonic's
common stock, par value $.01 per share (the "Common Stock") in the ratio of
one-for-ten at any time prior to June 1, 2004 the ("Reverse Stock Split").
3. To elect one director to hold office for a term of five years, and until
his successor is duly elected and qualified.
4. To ratify the appointment of Ernst & Young LLP as our independent auditors
for the fiscal year ending September 30, 2003.
5. To transact such other business as may properly come before the meeting or
any adjournments thereof.
All the above matters are more fully described in the accompanying Proxy
Statement. Under the MGCL, stockholders do not have appraisal rights in
connection with the Proposed Transaction.
Only holders of record of Common Stock at the close of business on June
_, 2003 are entitled to notice of, and to vote at, this meeting or any
adjournment or adjournments thereof.
Please complete and return the enclosed proxy in the envelope provided or,
for stockholders receiving a mailing from ADP, you may also follow the
instructions on the proxy card to authorize a proxy by telephone or over the
Internet, whether or not you intend to be present at the meeting in person.
By Order of the Board of Directors,
/s/ Kenneth A. Minor
-----------------------------------
Kenneth A. Minor
Secretary
Madison, Wisconsin
June _, 2003
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If you cannot personally attend the meeting, it is earnestly requested that you
promptly indicate your vote on the issues included on the enclosed proxy and
date, sign and mail it in the enclosed self-addressed envelope, which requires
no postage if mailed in the United States or, for stockholders receiving a
mailing from ADP, you may also follow the instructions on the proxy card to
authorize a proxy by telephone or over the Internet. Doing so will save us the
expense of further mailings. If you sign and return your proxy card without
marking choices, your shares will be voted in accordance with the
recommendations of the Board of Directors.
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SONIC FOUNDRY, INC. 1617 Sherman Avenue Madison, WI 53704
June ___, 2003
PROXY STATEMENT
The Board of Directors of Sonic Foundry, Inc., a Maryland corporation
("Sonic"), hereby solicits the enclosed proxy. Unless instructed to the
contrary on the proxy, it is the intention of the persons named in the proxy to
vote the proxies:
FOR the proposal to approve (A) the Amended and Restated Asset Purchase
Agreement, dated as of June 6, 2003 and effective as of May 2, 2003 (the
"Amended and Restated Asset Purchase Agreement"), by and between SP
Acquisition Company, a corporation formed under the laws of Delaware
("SPA") and a wholly-owned subsidiary of Sony Pictures Digital Inc., a
Delaware corporation ("SPD"), and Sonic; and (B) the sale of substantially
all the business, operations and assets of the Desktop Software Business of
Sonic as contemplated by the Amended and Restated Asset Purchase Agreement
(the "Proposed Transaction") which constitutes a sale of substantially all
the assets of Sonic pursuant to Maryland General Corporation Law (the
"MGCL");
FOR the grant of discretionary authority to Sonic's board of directors to
amend Sonic's charter to approve a reverse stock split of Sonic's common
stock at a ratio one-for-ten at any time prior to June 1, 2004 the
("Reverse Stock Split") and
FOR the election as director of the nominee listed below for a term
expiring in 2008; and
FOR the ratification of the appointment of Ernst & Young LLP as independent
auditors of Sonic for the fiscal year ending September 30, 2003.
In the event that the nominee for director becomes unavailable to serve,
which management does not anticipate, the persons named in the proxy reserve
full discretion to vote for any other person who may be nominated. Proxies may
also be authorized by telephone or over the Internet by following the
instructions on the proxy card, if you received your mailing from ADP. Any
stockholder giving a proxy may revoke the same at any time prior to the voting
of such proxy. This Proxy Statement and the accompanying proxy are being mailed
on or about June ___, 2003. If the Proposed Transaction is completed, the Board
of Directors of Sonic (the "Board") intends to concentrate Sonic's efforts on
the Media Systems Business.
Each stockholder will be entitled to one vote for each share of Common
Stock standing in his or her name on our books at the close of business on June
___, 2003 (the "Record Date"). On that date, we had outstanding and entitled to
vote 27,784,509 shares of Common Stock.
QUORUM; VOTES REQUIRED
As of the Record Date, there were 27,784,509 shares of Common Stock issued
and outstanding and entitled to vote. Each share of issued and outstanding
Common Stock entitles the holder thereof to one vote. Votes cast by proxy or in
person at the Annual Meeting will be tabulated by the inspector of elections
appointed for the Annual Meeting and will determine whether or not a quorum is
present. Where, as to any matter submitted to the stockholders for a vote,
proxies are marked as abstentions (or stockholders appear in person but abstain
from voting), such abstentions will be treated as shares that are present and
entitled to vote for purposes of determining the presence of a quorum but as
unvoted for purposes of determining the approval of any matter submitted to the
stockholders for a vote. If a broker indicates on the proxy that it does not
have discretionary authority as to certain shares to vote on a particular matter
and has not received instructions from the beneficial owner, which is known as a
broker non-vote, those shares will not be considered as present and entitled to
vote with respect to that matter; however, such shares will be considered
present for purposes of a quorum. A majority of the shares of Common
1
Stock issued, outstanding and entitled to vote at the Annual Meeting, present in
person or represented by proxy, shall constitute a quorum at the Annual Meeting.
As the affirmative vote of the holders of two-thirds of the shares of
Common Stock entitled to vote will be necessary for the approval of the Proposed
Transaction and the Reverse Split, abstentions and broker nonvotes will have the
same effect as votes against the Proposed Transaction and the Reverse Split. The
election of the Director requires a plurality of the votes present and entitled
to vote. The approval of each other proposal requires the affirmative vote of
the holders of a majority of the votes cast at the Annual Meeting and entitled
to vote.
NO APPRAISAL RIGHTS
Under MGCL, stockholders of Sonic do not have appraisal rights in
connection with the Proposed Transaction.
SUMMARY TERM SHEET
The following is a summary of information contained elsewhere in this Proxy
Statement. The following summary is not intended to be complete and is qualified
in its entirety by reference to the more detailed information contained in this
Proxy Statement and in the Appendices attached hereto. You are urged to review
the entire Proxy Statement carefully. References in this Summary and throughout
the Proxy Statement to "we", "us", "our" or the "Company" refer to Sonic
Foundry, Inc. and its subsidiaries, taken as a whole.
DATE, TIME AND PLACE OF ANNUAL MEETING
The Annual Meeting will be held on July ___, 2003 at 9:00 a.m. (Central
time) at the Monona Terrace Community and Convention Center, One John Nolen
Drive, Madison, Wisconsin 53703.
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
Only holders of issued and outstanding shares of the Company's common stock
as of the close of business on June ___, 2003 are entitled to notice of and to
vote at the Annual Meeting, including any adjournment or postponement thereof.
As of that date, there were 27,784,509 shares of the Company's common stock
issued and outstanding, held by less than 10,000 shareholders, of which
approximately 9,000 were held in "street name". The presence, in person or by
proxy, at the Annual Meeting of the holders of a majority of the outstanding
shares of our common stock is necessary to constitute a quorum at the Annual
Meeting.
PURPOSES OF THE ANNUAL MEETING
Four proposals will be presented at the Annual Meeting:
First, you are being asked to approve the sale of our Desktop Software
Business, which may be deemed to represent substantially all of our remaining
assets, as described in the Amended and Restated Asset Purchase Agreement among
Sonic and the purchaser, SP Acquisition Company, a Delaware corporation.
Second, you are being asked to grant Sonic's Board of Directors
discretionary authority to amend Sonic's charter to effect a reverse stock split
of Sonic's common stock in the ratio of one-for-ten at any time prior to June 1,
2004.
Third, you are being asked to elect one director to hold office for a term
of five years.
Fourth, you are being asked to ratify the appointment of Ernst & Young, LLP
as our independent auditors for the fiscal year ending September 30, 2003.
At the annual meeting, we may also transact such other business as may
properly come before the meeting or any adjournment thereof.
STOCKHOLDER APPROVAL OF THE SALE OF THE DESKTOP SOFTWARE BUSINESS
Approval of the sale of the Desktop Software Business requires the
affirmative vote of holders of at least two-thirds of all issued and outstanding
shares of our common stock. Holders of approximately 27% of our common stock
held by certain of our officers and directors have agreed to vote in favor of
the sale.
STOCKHOLDER APPROVAL OF OTHER MATTERS
Approval of the reverse stock split requires the affirmative vote of
holders of at least two-thirds of all issued and outstanding stock. The election
of the director requires the approval of a plurality of the votes present and
entitled to vote. The approval of each other proposal requires the affirmative
vote of the holders of a majority of the votes cast at the Annual Meeting.
THE COMPANY
Until recently, we were engaged in three businesses -Desktop Software,
Media Services, and Media Systems. The Desktop Software Business designs,
develops, markets and supports deskware software products for digitizing,
converting, editing and publishing of audio, video, and/or multimedia content.
In 2002, annual revenue from our Desktop Software Business was $15.9 million, or
approximately 61% of our total revenues.
On May 16, 2003, we completed the sale of the assets relating to our Media
Services Business for $5,600,000, including net working capital. In fiscal 2002,
our Media Services business generated revenue of $9.4 million, or approximately
36% of our total revenues.
As a result of the sale of our Desktop Software Business and our Media
Services business, we will still own our Media Systems business, and will have
approximately $15 million in cash, after payment of certain indebtedness. We
plan to utilize the cash for development of our Media Systems business. However,
that business generated revenues of only approximately $900,000 in fiscal 2002.
The Media Systems business develops automated rich-media application software
and systems. See discussion in the Proxy Statement under the heading "Proposal
One: The Proposed Sale of the Desktop Software Business - Sonic Foundry's
Continuing Media Systems Business".
SUMMARY OF TERMS OF THE PROPOSED ASSET SALE
Pursuant to the terms of the Amended and Restated Asset Purchase Agreement,
we have agreed to sell (subject to stockholder approval) substantially all of
the assets of our Desktop Software Business for total consideration of
approximately $19 million, plus assumption of certain liabilities. See
discussion in the Proxy Statement under the heading "Proposal One: The Proposed
Sale of the Desktop Software Business - The Consideration".
The Proposed Transaction is subject to the satisfaction or waiver of
several conditions, including the approval of Sonic's stockholders. See
discussion in the Proxy Statement under the heading "Proposal One: The Proposed
Transaction of the Desktop Software Business - Condition to the Closing of the
Sale". Either party may terminate the asset purchase agreement if the Proposed
Transaction is not completed by September 30, 2003, subject to extension to
November 30, 2003, under certain circumstances and for other reasons described
under the heading "Proposal One: The Proposed Sale of the Desktop Software
Business - Termination".
PROPOSAL ONE: THE PROPOSED SALE OF THE DESKTOP SOFTWARE BUSINESS
At the Annual Meeting, Sonic's stockholders will consider and vote upon a
proposal to approve the Amended and Restated Asset Purchase Agreement (a copy of
which is attached to this Proxy Statement as Appendix A and is incorporated
herein by reference) between Sonic and SPA and the sale of substantially all the
business, operations and assets of the Desktop Software Business of Sonic (the
"Desktop Software Business"), as contemplated by the Amended and Restated Asset
Purchase Agreement, which constitutes a sale of substantially all of the assets
of Sonic pursuant to MGCL, for $19 million in cash and the forgiveness of
approximately $135,000 due SPD by Sonic, plus the assumption of certain
liabilities, and SPA's agreement to purchase 10 MediaSite Live units from Sonic
for a total consideration of approximately $300,000.
BOARD OF DIRECTORS RECOMMENDATION
AFTER CAREFUL CONSIDERATION, SONIC'S BOARD HAS DETERMINED THAT THE AMENDED
AND RESTATED ASSET PURCHASE AGREEMENT IS ADVISABLE, FAIR TO, AND IN THE BEST
INTERESTS OF, SONIC AND ITS STOCKHOLDERS. ACCORDINGLY, SONIC'S BOARD HAS
UNANIMOUSLY APPROVED THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT AND THE
PROPOSED TRANSACTION, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF
THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT AND THE PROPOSED TRANSACTION,
INCLUDING THE ASSET SALE.
SUMMARY OF EXISTING OPERATIONS
Prior to the sale of our Media Services business, we conducted our business
in three separate operations: the Desktop Software Business, services and
systems software. The Desktop Software Business operations are performed
directly through Sonic Foundry, Inc. and recorded fiscal 2002 revenues of $15.9
million while our services operations were performed primarily through two
subsidiaries, Sonic Foundry Media Services, Inc. and International Image
Services Corporation, Inc. d/b/a Sonic Foundry Media Services, and recorded
fiscal 2002 revenues of $9.4 million. Our systems software operations are
performed through Sonic Foundry Systems Group, Inc. d/b/a Sonic Foundry Media
Systems and recorded fiscal 2002 revenues of $0.9 million.
BACKGROUND TO THE TRANSACTION
The industry in which Sonic's Desktop Software Business operates is
intensely competitive. As a result, Sonic has been competing increasingly with
larger, better-capitalized competitors with further developed partner and
distribution channels. Sonic has regularly evaluated alternative strategies for
improving its competitive position and enhancing stockholder value. As part of
these evaluations, Sonic has, from time to time, considered various strategic
alternatives, including acquisitions, sales of assets or business units, the
sale of Sonic and various business combinations. On August 12, 2002, Sonic
retained Silverwood Partners LLC ("Silverwood") to assist in evaluating Sonic's
strategic alternatives. Silverwood is an investment banking firm, registered
with the Securities and Exchange Commission and NASD, Inc., that specializes in
mergers and acquisitions and institutional financing transactions for companies
in selected sectors, including the media communication technology industry.
On September 18, 2002, the Board met to consider industry weakness,
challenges faced with managing Sonic's three disparate business units located in
separate geographic locations, Sonic's limited cash resources, Sonic's inability
to meet upcoming debt payments and the anticipation that Sonic's auditors would
be likely to issue a "going concern" opinion in connection with Sonic's
financial statements for the fiscal year ending September 30, 2002 as a result
of Sonic's financial condition. Silverwood presented its findings at the board
meeting. These
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findings included, in addition to the factors mentioned above, reduced growth
opportunities in Sonic's principal markets, increased competition, a lack of
corporate resources and other challenges. Silverwood also noted the difficulty
faced by an investor in evaluating and valuing Sonic given its multiple lines of
business. Silverwood further noted that Sonic's three business units also
created management challenges as each business was in a different industry
segment and each business was facing operating and sector circumstances that
required a wide range of management capabilities.
The Desktop Software Business had relatively mature products and was
increasingly competing with large, well-capitalized companies. Sonic's
professional/high end consumer niche was being targeted (i) by the traditional
providers of high-performance, professional grade audio and video software that
were introducing lower price point, competitively featured versions of their
products, and (ii) by providers of consumer versions of audio and video editing
software that were steadily adding functionality and features to their products
at price points below those offered by Sonic.
The Media Services business ("Media Services") was a mature, relatively
small business that was a result of several acquisitions Sonic had made over
recent years. At the time of the September 18, 2002, board meeting, Media
Services offered format conversion, tape duplication, film restoration and other
services to the media, broadcast and entertainment industries. This industry is
dominated by a small number of large, well-capitalized service providers and
Media Services also experienced competition from the in-house capabilities of
its customers. Further, Media Services consistently generated revenue from a
small number of large customers which created the potential for a rapid,
substantial revenue decline if any one such customer were to terminate its
business relationship with Media Services.
The Media Systems business ("Media Systems") addresses a rapidly growing
market in an early stage business that has been built around technology and
products acquired in connection with Sonic's purchase of MediaSite, Inc. on
October 15, 2001. Media Systems is developing media communication software and
products for the enterprise and government markets. While there is significant
competition in such markets, there is still great fluidity over what products
and functionality will be most in demand from customers as a result of ongoing
developments in technology infrastructure and increased bandwidth availability.
After considering Silverwood's presentation and other relevant factors, the
Board authorized Sonic's officers to market for sale Sonic's ACID software
product line (the "ACID Business") and Media Services and evaluate the various
combinations of opportunities that would be generated by such an initiative.
After considering Silverwood's presentation, and after discussion and
deliberation, the Board authorized Sonic's officers to negotiate the retention
of Silverwood to contact agreed upon potential buyers and to assist Sonic in the
evaluation of various opportunities. On September 25, 2002, Sonic formally
retained Silverwood to act as its financial advisor.
In early October 2002, Sonic, with Silverwood's assistance, developed a
list of approximately 40 potential acquirers for Sonic's ACID Business and
prepared descriptive materials for the ACID Business for distribution to
interested entities. Silverwood thereafter commenced contacting the potential
acquirers at Sonic's direction. Silverwood contacted most of the companies from
the agreed upon list, including SPD, and distributed summary information to over
20 companies.
After reviewing the materials prepared about Sonic's ACID Business,
interested parties indicated a preference to purchase Sonic's entire audio
software business (the "Audio Business") rather than solely the ACID Business.
The Audio Business comprised the ACID Business, Sonic's Sound Forge software
product and certain other derivative and related software products. No
prospective purchasers indicated an interest in buying the ACID Business alone.
SPD had an ongoing relationship with Sonic due to its re-licensing and
development agreement for certain SPD software products. The parameters of such
relationship were defined by various contractual agreements between Sonic and
SPD (collectively, the "SPD Contract") that involved certain software
development obligations on the part of Sonic in exchange for Sonic being paid a
portion of revenue generated from sales of SPD's Screenblast line of audio and
video editing software. Such software offerings provided consumer versions of
many of the products
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developed by the Desktop Software Business.
In discussions among SPD, Silverwood and Sonic executives in connection
with the Proposed Transaction and the SPD Contract, SPD had, on a very
preliminary basis, expressed an interest in acquiring the Desktop Software
Business. As a result of SPD's and other potential buyers' interest beyond the
ACID Business, and a lack of interest from potential purchasers in acquiring the
ACID Business alone, Sonic's management and Board discussed various alternatives
and directed Silverwood to pursue the sale of the Audio Business.
From mid-October 2002 through November 2002, in response to the
distribution of summary business information regarding Sonic's Audio Business,
13 companies indicated a level of interest and requested more detailed
additional information. Sonic, with Silverwood's assistance, negotiated a
non-disclosure agreement ("NDA") with each of the interested parties and
distributed a descriptive information memorandum for the Audio Business to the
12 companies that executed an NDA. One initially interested party declined to
execute the NDA.
On or about October 31, 2002, at Sonic's direction, Silverwood sent letters
to 7 companies that had verbally expressed interest in acquiring the Audio
Business, requesting that they formally indicate their level of interest in
writing prior to scheduling on-site presentations and a detailed review of
additional business documentation.
On November 4, 2002, Silverwood and SPD met via conference call to discuss
the possible acquisition of all or part of the Desktop Software Business. SPD
had previously executed a non-disclosure agreement in connection with the
activities relating to the SPD Contract and SPD was familiar with the Desktop
Software Business. SPD was advised of the ongoing initiatives relating to the
Desktop Software Business. On November 4, 2002, SPD, Sonic and Silverwood
executed an additional NDA with a scope appropriate for the possible transaction
under review and descriptive materials for the Audio Business, including the
information memorandum, were sent to SPD.
On November 5, 2002, Sonic and Company A (a mid-cap public company) met via
conference call to discuss questions that arose from Company A's review of the
descriptive information it had received. On November 6, 2002, Sonic received a
written but non-binding preliminary expression of interest from Company B (a
small-cap public company) to acquire the Audio Business for $4 - $6 million. On
November 8, 2002, Sonic received a written but non-binding preliminary
expression of interest from Company A to acquire the Audio Business for $6 - $11
million. On November 8, 2002, Sonic met via conference call with representatives
from Company C (a large-cap public company) to discuss questions that arose from
Company C's review of the descriptive information it had received.
In the course of preliminary business due diligence, prospective purchasers
were made aware that Sonic's ACID software product shared a substantial amount
of software code with Sonic's Vegas video editing software, which was not part
of the Audio Business. While feasible, the practicalities of dividing the
software code base to allow for the separate sale of ACID without Vegas became a
concern for prospective acquirers and almost all such acquirers expressed an
interest in purchasing the Desktop Software Business in its entirety. In early
November 2002, Sonic, with Silverwood's assistance, prepared descriptive
materials for Sonic's video software products and began distributing such
information to interested parties.
On November 12, 2002, Sonic met with SPD via conference call to discuss
detailed financial and legal questions and subsequently forwarded to SPD
information that addressed SPD's questions. On November 14, 2002, Sonic held a
further conference call with SPD to follow up on the information that had been
sent.
On November 18, 2002, Sonic held a conference call with Company C
executives regarding further questions.
Between November 19, 2002 and November 22, 2002, formal due diligence
meetings commenced in Madison, with Company A, Company B and SPD. For each
company, Sonic delivered a presentation regarding the Audio Business and
provided an opportunity to review contracts and other detailed materials.
On December 2, 2002, Silverwood held a conference call with several
representatives of SPD. The SPD
4
representatives highlighted certain items of concern, including certain business
and legal issues that factored into SPD's valuation analysis for the business.
On December 5, 2002, Sonic attended a conference call with Company B
regarding valuation and transaction points. Company B informed Sonic that it
would not assume the SPD Contract as part of the transaction, which would
require Sonic to continue to fulfill the SPD Contract without the benefit of
ownership of the Desktop Software Business code base.
On December 5 and 6, 2002, Company A attended a meeting in Madison to
review detailed financial records, and discuss valuation and transaction
structure. Company A emphasized its intent to assume the SPD Contract. A verbal
indication of interest in purchasing the Desktop Software Business at a price
equal to one times trailing twelve month sales, or approximately $16.7 million,
was suggested by an executive of Company A.
On December 10, 2002, Sonic executives attended a conference call with
Company B to answer financial questions and provide other additional
information. Company B requested Sonic's preferred form of asset purchase
agreement but also indicated that an exclusive dealing arrangement would be
required before continuing with further due diligence. Such exclusive dealing
request was declined by Sonic.
On December 11, 2002, Company A engineering personnel attended an on-site
meeting in Madison with members of the Sonic engineering team. Silverwood held a
conference call later in the day to discuss the level of interest with Company A
management.
During early December, Sonic delivered, via Silverwood, Sonic's preferred
form of draft asset purchase agreement for the Audio Business to both Company A
and Company B, each of which had attended due diligence meetings in Madison and
had undertaken a detailed review of business documents.
On December 19, 2002, Silverwood held a conference call with SPD regarding
obstacles SPD had cited that prevented SPD from forwarding a written,
non-binding indication of interest for the Desktop Software Business.
On December 20, 2002, a meeting occurred at Sonic's Madison headquarters
between Sonic and a third party engaged by SPD to review source code and resolve
other questions.
On December 20, 2002, Company C made a verbal indication of interest in an
acceptable valuation range and Company C was allowed to move forward with the
due diligence process.
On December 23, 2002, Silverwood held a conference call with Company B
regarding valuation. Silverwood informed Sonic's senior management that Company
B indicated an ability to increase its bid to $7 million from the prior bid of
$6 million for the Audio Business.
On January 6 and 7, 2003, Company C engineering personnel attended meetings
at Sonic's Madison headquarters for a review of source code and technology
issues. On January 10, 2003, Silverwood met by conference call with Company C to
discuss the timing and structure of a possible acquisition of the Desktop
Software Business.
On January 14, 2003, representatives of Silverwood met with executives of
Company D (a mid-cap public company), a company that had previously indicated a
lack of interest in acquiring the Desktop Software Business. At the end of the
meeting, Company D expressed an interest in becoming more engaged in the sale
process and immediately thereafter commenced active due diligence.
On January 14, 2003, in a conference call with Silverwood, Company C
indicated further interest in the Desktop Software Business by its executives
and stressed the importance of retaining key engineering personnel in the event
of an acquisition. Additional discussions focused on the development cycle of
all video and audio software products and the method by which Sonic's
engineering team is typically utilized. Company C indicated a decision to
5
move forward could be made by the end of January.
On January 15, 2003, Sonic held a conference call with Company D executives
where representatives of Sonic reviewed its management presentation and followed
such presentation with a question and answer session. Sonic also delivered, via
Silverwood, Sonic's preferred form of draft asset purchase agreement for the
Audio Business.
On January 15, 2003, Silverwood participated in a conference call with SPD
to discuss several issues, including outstanding litigation involving Sonic, SPD
and Nova Development Corporation, approvals needed by SPD affiliate executives,
and the anticipated requirement for Sonic stockholder approval of a sale of the
Desktop Software Business. SPD indicated that a non-binding written expression
of interest would be sent the following week.
On January 17, 2003, executives from Company D and Sonic met at a west
coast trade show to discuss the potential acquisition of the Desktop Software
Business.
On January 20 and 21, 2003, Sonic met with Company A executives in Madison,
WI. Representatives of Sonic delivered a management presentation to update
individuals not present at the first such meeting. A question and answer session
followed. Company A discussed with Sonic's management and Silverwood certain
conditions for an offer to be realized. Company A was again given the
opportunity to review contracts and other detailed materials.
On January 20 and 21, 2003, a third party engaged by SPD met with Sonic
engineering personnel to complete further due diligence on source code and other
technical issues.
On January 23, 2003, Sonic's management held a conference call with an
additional company that had expressed an interest in acquiring the Audio
Business. Future discussion with this company led to a verbal indication of
interest that was less attractive than other indications of interest and
discussions were terminated.
On January 27, 2003, Sonic held a conference call with Company C
executives. Representatives of Sonic delivered a management presentation that
was followed by a question and answer session. Company C expressed concern over
separating the audio technology and patents from the software group.
On January 29, 2003, Sonic received a written, non-binding offer from SPD
to purchase the Desktop Software Business for $8 to $10 million in cash. This
offer was subject to several material and significant conditions. Sonic
management indicated that the offer was too low to merit proceeding forward with
in-depth negotiation of definitive documentation with SPD. On January 30, 2003,
Silverwood participated in a conference call with SPD representatives regarding
the SPD offer. SPD discussed the reasons for its valuation decision.
On January 31, 2003, Silverwood participated in a conference call with
Company C, which indicated that the potential acquisition was a priority for
Company C and was actively being discussed by Company C internally. Company C
also indicated that it would take another 10 to 14 days to reach internal
consensus on an offer. Company C indicated verbally that an offer of $10 to $12
million might be possible.
On January 31, 2003, Silverwood participated in a conference call with
Company A regarding the strategic fit of the potential acquisition, operating
expense allocations, receivables, and transaction structure, including the
possible form of consideration (e.g., stock versus cash).
On February 6, 2003, after a meeting of its board, Company A provided a
revised written but non-binding offer to purchase the Desktop Software Business
for $12 million, of which $10 million would be in stock with the remaining $2
million in cash. Accounts receivable over a 90-day period would be paid in cash.
As this written offer was substantially below the verbal indication previously
given by Company A, discussions with Company A became less intensive at this
juncture.
On February 11, 2003, Sonic's engineering staff participated in a
conference call with Company C engineering
6
personnel. On February 18, 2003, Silverwood participated in a conference call
with Company C, during which Company C indicated that several obstacles needed
to be addressed. Such concerns included a need to meet several of Sonic's
engineering staff, the anticipated requirement for Sonic stockholder approval
for the sale of the Desktop Software Business, post-acquisition transition
issues, and possible antitrust issues that may be triggered by a possible
transaction with Company C. It was suggested verbally by Company C that an offer
in the $13 to $14 million range might be possible.
On February 20 and 21, 2003, Sonic held several meetings at Sonic's Madison
headquarters with various SPD representatives. Sonic delivered a management
presentation that was followed by meetings regarding human resources, technology
considerations, marketing and sales, and facilities relating to Sonic's Desktop
Software Business. SPD expressed its continued interest in acquiring the Desktop
Software Business but the SPD representatives present indicated that additional
support from other Sony affiliates would be required to support a higher bid. It
was agreed that follow-on presentations at selected Sony affiliate facilities
would be an appropriate next step.
On March 3, 2003, Company C indicated that consensus had still not been
reached internally concerning proceeding with active transaction negotiations
and that its view on valuation had not changed.
On March 4, 2003, Silverwood and Company B met via conference call to
discuss the status of the acquisition process. Company B indicated continued
interest in the acquisition of the Audio Business and a possible interest in the
acquisition of the Desktop Software Business. At Sonic's direction, Silverwood
subsequently sent updated information to Company B.
On March 5 and 6, 2003, Sonic and Silverwood met with Company D
representatives at Sonic's Madison, WI, headquarters. Sonic delivered a
management presentation, made additional presentations and hosted question and
answer sessions on technical, human resources, financial and other relevant
subjects.
On March 11, 2003, Sonic representatives visited with various SPD
representatives in New Jersey to deliver a management presentation and
demonstrate the capabilities of the products developed by the Desktop Software
Business.
On March 13, 2003, Sonic participated in a conference call with Company D
regarding the provision of additional financial information. On March 18 and 19,
2003, Sonic and Silverwood met with Company D representatives at Sonic's Madison
headquarters. Sonic delivered presentations and hosted question and answer
sessions on technical, human resources, financial and other relevant subjects.
On March 19, 2003, Sonic's staff met with SPD personnel at Sonic's Madison
headquarters to review various business and other technology related matters.
On or about March 19, 2003, Silverwood sent letters to Company C, Company D
and SPD requesting that revised written indications of interest be submitted.
On March 26, 2003, Sonic conducted a tour of Sonic's Madison, WI
headquarters facility with a representative of Company D.
On March 26, 2003, Sonic received a written non-binding expression of
interest from SPD for the Desktop Software Business for $12.5 million in cash.
On March 27, 2003, Sonic received a written, non-binding offer from Company
D for the Desktop Software Business for $10 million in cash and Company D common
stock.
On March 28, 2003, Silverwood contacted Company A to determine if Company
A's interest level had changed. That day, the Chairman and Chief Executive
Officer of Sonic received a telephone call from the Chairman
7
of Company A expressing an interest in more actively exploring a purchase of the
Desktop Software Business. Company A's Chief Executive Officer also subsequently
telephoned Sonic's Chairman and Chief Executive Officer to further emphasize the
interest level.
On April 2, 2003, Sonic received a revised non-binding offer from Company B
for the Audio Business for $10 million in Company B common stock.
From April 7 through April 9, 2003, at the National Association of
Broadcasters ("NAB") trade show in Las Vegas, NV, several additional meetings
took place with executives of three prospective purchasers of the Desktop
Software Business.
On April 7, 2003, Sonic and Silverwood held several meetings with SPD
executives in Las Vegas, NV to further discuss the potential acquisition.
Several additional telephone calls took place between SPD and Silverwood that
week, during which SPD was told that price expectations for the sale were
substantially above SPD's current offer. SPD was informed that Sonic would soon
be selecting a prospective purchaser for final negotiation of definitive
transaction documentation and that SPD should be prepared to forward its best
offer for the Desktop Software Business.
During the week of April 7, 2003, Company B was informed that Sonic would
soon be selecting a prospective purchaser for final negotiation of definitive
transaction documentation and that Company B should be prepared to forward its
best offer for the Desktop Software Business. Company B indicated that it had no
interest in acquiring the video software assets within the Desktop Software
Business and that its proposal would reflect such position. On April 16, 2003,
Silverwood discussed with Company B the issues around a possible proposal for
the purchase of the Audio Business. Company B requested ownership of all
underlying code and suggested a form of license back for shared technology with
certain of Sonic's products. Company B again indicated a lack of interest in
assuming the SPD Contract.
On April 8, 2003, Sonic's Chairman and Chief Executive Officer and a
Silverwood representative met with Company A's Chairman and Company A's Chief
Executive Officer in Las Vegas to discuss the acquisition of the Desktop
Software Business. An additional meeting was held at the NAB tradeshow between
Silverwood representatives and Company A's Chief Financial Officer. Company A
was informed that Sonic would soon be selecting a prospective purchaser for
final negotiation of definitive transaction documentation and that Company A
should be prepared to forward its best offer for the Desktop Software Business.
On April 9, 2003, representatives of Sonic and Silverwood met with
executives from Company D at the NAB tradeshow. Company D was informed that
Sonic would soon be selecting a prospective purchaser for final negotiation of
definitive transaction documentation and that Company D should be prepared to
forward its best offer for the Desktop Software Business.
On April 15, 2003, Sonic delivered a presentation in Chicago to various SPD
representatives. On April 16, 2003, SPD engineering personnel met with Sonic
engineering personnel in Madison to further discuss technology issues.
Representatives of SPD also met with a representative of Sonic's audit firm,
Ernst and Young LLP, to review certain financial accounting and audit matters on
April 9, 2003.
On April 17, 2003, Sonic received a non-binding offer from Company D for
the Desktop Software Business for $10 million in cash and Company D common
stock. Company D indicated that this was a best and final offer. This was no
change from the offer made by Company D on March 27, 2003.
On April 17, 2003, Sonic received a non-binding offer from Company A for
the Desktop Software Business for $16.5 million in cash and Company A common
stock in the form of a preliminary asset purchase agreement based substantially
on the form that had been provided by Sonic. On April 21, 2003, in discussions
with Silverwood, Company A agreed to several additional concessions in its
proposal.
8
On April 18, 2003, Silverwood had a discussion with Company B, during which
Company B suggested offering $12 million in Company B common stock for the
Desktop Software Business, 20% of which would be escrowed at the closing of a
transaction. Such proposal required an exclusive dealing period for further
negotiation. Company B continued to express a lack of interest in assuming the
SPD Contract.
On April 22, 2003, Sonic received a written non-binding offer from SPD for
the Desktop Software Business for $15 million in cash. SPD also provided a form
of definitive asset purchase agreement and a form of exclusive dealing letter
and noted that execution of such letter agreement was a prerequisite for further
negotiation of the SPD offer. Later that day, a Silverwood representative
telephoned SPD and asked that SPD increase its offer, include a good faith
deposit and remove certain closing conditions from its proposed definitive
transaction documentation. SPD reconfirmed its offer and suggested that no
changes would be made. Later that day, a Silverwood representative was contacted
by a SPD representative, requesting the amount of total consideration necessary
to accept SPD's offer prior to SPD requesting authorization for additional
consideration.
On April 23, 2003, Silverwood and Sonic executives met by telephone to
discuss the proposals that had been made. Silverwood reviewed the prior
evening's telephone discussion with SPD. Sonic decided that Company A's $16.5
million proposal was the most compelling offer with respect to both price and
terms in the proposed Company A definitive transaction agreement. Sonic
instructed Silverwood to request several additional concessions from Company A,
including the modification of an adjustment mechanism that "collared" Sonic's
potential proceeds from the possible sale of Company A's stock and that was
estimated to be worth approximately $290,000 using a Black-Scholes option
valuation analysis. When contacted by Silverwood, Company A agreed to the
requested changes and Company A was informed that it was, at that time, the
preferred purchaser of the Desktop Software Business. Company A was asked to
modify its proposed form of definitive transaction agreement and resubmit it to
Sonic for review.
Shortly after speaking with Company A, Silverwood was contacted by SPD to
indicate that a revised offer would be forthcoming. SPD subsequently delivered a
cash offer of $16.5 million, which tentatively included a good faith deposit,
the elimination of certain closing conditions, the favorable revision of certain
proposed representations and warranties, and the forgiveness of an approximately
$135,000 payable due to SPD by Sonic. Silverwood discussed the SPD proposal with
Sonic's management and Sonic decided to inform SPD its offer was not sufficient
due to the inferior value of the consideration offered and the uncertainty
associated with the extent and nature of certain unresolved issues in the
proposed SPD definitive asset purchase document. That afternoon, a
representative of Silverwood contacted SPD and informed SPD representatives of
Sonic's decision.
Several hours later in the evening of April 23, SPD representatives
contacted Sonic's Chief Executive Officer and Chief Technology Officer and a
Silverwood representative. A Silverwood representative spoke with a SPD
executive and SPD confirmed its intent to increase its cash offer to $18 million
for the Desktop Software Business and include a $900,000 good faith deposit. SPD
also asked for an exclusive dealing period. Sonic agreed to continue to
negotiate with SPD to determine if mutually acceptable definitive transaction
documentation could be agreed. The SPD exclusive dealing request was declined.
Representatives of SPD, Sonic, Silverwood and Sonic counsel met by telephone and
immediately commenced detailed transaction negotiations.
From April 24, 2003, through May 1, 2003, representatives of Sonic, SPD,
Silverwood and Sonic counsel met by telephone and in person at Sonic's Madison,
WI, headquarters facility to negotiate definitive transaction documentation and
attempted to reach agreement on certain material terms and conditions.
On April 26, 2003, Silverwood rendered and delivered a fairness opinion to
Sonic's Board that as of that date and based on and subject to the matters set
forth in its opinion, the consideration to be received by Sonic from SPD in
connection with the sale of the Desktop Software Business was fair to Sonic from
a financial point of view
On April 26, 2003, counsel for Company A transmitted a revised form of
proposed definitive transaction documentation to representatives of Sonic,
Silverwood and Sonic counsel.
On April 29, 2003, Sonic's Board held a special meeting to consider the
sale of the Desktop Software Business
9
and certain other matters, including the sale of the assets of Media Services.
Sonic's Chairman and Chief Executive Officer presented the principal terms of
SPD's and Company A's proposal and reviewed the other proposals that had been
received. Silverwood delivered a presentation that reviewed the factors
considered in rendering the previously provided fairness opinion dated April 26,
2003. Sonic's legal advisors reviewed the implications of the terms and
conditions in the definitive documentation. After a lengthy period of
deliberation and discussion, Sonic's Board authorized Sonic officers to
negotiate and execute a definitive asset purchase agreement with SPD for the
sale of the Desktop Software Business on substantially the terms proposed,
subject to the approval and agreement of Sonic counsel.
On May 2, 2003, Sonic and SPA executed a definitive asset purchase
agreement for the sale of the Desktop Software Business for total consideration
of $18,000,000 in cash and the forgiveness of approximately $135,000 due SPD by
Sonic, plus assumption of certain liabilities (the "Asset Purchase Agreement").
The transaction was announced in a joint press release by Sonic and SPD on May
2, 2003. Nine hundred thousand dollars of the consideration was deposited by SPD
into an escrow account as a good faith deposit (the "Deposit"). All other
prospective purchasers were informed immediately of the decision and asked to
return to Silverwood, or certify the destruction of, all Sonic confidential
information.
On May 20, 2003, Company A sent a letter to Sonic proposing to: (i) acquire
the Desktop Software Business for $22,000,000, pursuant to the terms and
conditions set forth in the documentation previously submitted by counsel for
Company A, which documentation was not in a form acceptable to Sonic and would
have required substantial negotiations and modifications, or (ii) alternatively,
make an offer to purchase all of Sonic's stock for an unspecified price. As
required by the terms of the Asset Purchase Agreement, Sonic forwarded the
proposal (the "Proposal") to SPA on May 21, 2003. Pursuant to the terms of the
Asset Purchase Agreement, if the Proposal satisfied certain requirements set
forth in the Asset Purchase Agreement, if Sonic's Board of Directors determined
that the Proposal constituted a Superior Proposal, and if, within five (5)
business days of Sonic's Board of Directors making such determination, the Asset
Purchase Agreement had not been revised such that the Proposal no longer
constituted a Superior Proposal, then Sonic could have begun negotiating with
Company A regarding the Proposal.
On Friday, May 23, 2003, however, counsel for Company A informed Sonic and
its counsel that Company A had withdrawn the Proposal. At the time of such
withdrawal, Sonic's Board of Directors had not determined whether the Proposal
would have constituted a Superior Proposal due to, among other reasons, the
uncertainty of the transaction.
On May 28, 2003, SPA agreed to increase the consideration it was willing to
pay for the Desktop Software Business to $19,000,000 in cash, to forgive
approximately $135,000 due to SPD by Sonic, plus assume certain liabilities.
Sonic and SPA negotiated other revisions to the Asset Purchase Agreement from
May 28, 2003 to June 6, 2003. On June 6, 2003, Sonic and SPA executed an Amended
and Restated Asset Purchase Agreement for the sale of the Desktop Software
Business for a total consideration of $19,000,000 in cash and the forgiveness of
approximately $135,000 due to SPD by Sonic, plus assumption of certain
liabilities, and SPA's agreement to purchase 10 MediaSite Live units from Sonic
for a total consideration of approximately $300,000.
THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT
Sonic and SPA entered into the Amended and Restated Asset Purchase
Agreement on June 6, 2003 that provides for the acquisition of Sonic's Desktop
Software Business. The transaction will be completed when all of the conditions
to completion of the transaction are satisfied or waived, including approval of
the Proposed Transaction as set forth in the Amended and Restated Asset Purchase
Agreement by Sonic's stockholders. The Amended and Restated Asset Purchase
Agreement may be terminated, and the Proposed Transaction not completed, under
certain circumstances that are described in this proxy statement and in the
Amended and Restated Asset Purchase Agreement.
THE CONSIDERATION
Upon completion of the transaction, Sonic will receive a total of $19
million cash for the Desktop Software Business, subject to an adjustment for the
change in net working capital acquired by SPA from March 31, 2003 to the date of
close (the "Working Capital"). The Deposit and any interest credited thereon to
the closing date will be credited at closing against the $19 million
consideration. If the transaction does not close by September 30, 2003, provided
that such date may be extended by either party up to and including November 30,
2003, under certain circumstances, including, in the event the proxy materials
have not been cleared by the Securities and Exchange Commission, solely as a
result of SPA's failure to perform, or decision not to perform, its obligations
under the Amended and Restated Asset Purchase Agreement, Sonic will retain the
deposit and interest credited thereon as liquidated damages.
INTERESTS OF MANAGEMENT AND THE BOARD OF DIRECTORS
Except in their capacity as stockholders of Sonic, and except as set forth
below, no director or executive officer of Sonic or any of their associates has
any substantial interest, direct or indirect, in the Proposed Transaction, nor
will any such person derive any extra or special benefit not shared on a pro
rata basis by all other stockholders of Sonic. However, it is a condition to the
consummation of the Proposed Transaction that certain of Sonic's officers and
directors enter into agreements with SPD or SPA. In particular, SPA may elect
not to close the Proposed Transaction unless: (i) SPD enters into an employment
agreement with (Y) Curtis Palmer, Sonic's Director and Chief Technology Officer,
or another specified key employee and (Z) three out of four specified key
employees of Sonic, which employment agreement must be offered to Mr. Palmer and
such other employees at a salary consistent with their current base salary, and
must provide for at least one-year terms and (ii) Monty Schmidt, Sonic's
President and a Director, enters into a non-competition agreement with SPA.
Except as set forth above, Sonic has not committed to enter into any other
employment or other agreement with any director or executive officer.
10
REASONS FOR THE PROPOSED TRANSACTION
Our Board approved the Proposed Transaction and the Amended and Restated Asset
Purchase Agreement based on a number of factors, including the following:
. the value of the consideration, exclusive of the working capital
adjustment, to be received from the sale of the Desktop Software
Business, represents 120% of fiscal 2002 desktop revenues, 228% of
assets excluding systems and services related assets and is 105% of
the current consolidated market capitalization of Sonic of
approximately $18 million at June 3;
. the consideration is all cash, which provides certainty of value
compared to a transaction involving receipt of stock or other non-cash
consideration, especially in light of the volatility of the stock
market;
. the financial stability of SPD and the fact that the Proposed
Transaction is not subject to a financing condition;
. the support for the Proposed Transaction by our largest stockholders,
who collectively hold approximately 27% of our outstanding stock;
. the financial analysis and presentation by Silverwood and the opinion
of Silverwood that, as of the date of the opinion, and based on
procedures followed, assumptions made, the matters considered and the
limitations on the review undertaken described in the opinion, the
consideration payable in the transaction was fair from a financial
point of view to Sonic;
. the fact that notwithstanding inquiries made by Sonic and its
financial advisors with respect to potential acquisitions transactions
for the Desktop Software Business, the offer by SPD was the best offer
received and outstanding;
. the requirement of certain secured lenders of Sonic to sell assets of
a sufficient size to repay the full balance of obligations owed them,
which may, in the absence of a sale of such assets, lead such secured
lenders to foreclose on the assets; and
. the need to generate sufficient resources to pursue Sonic's continuing
business.
BOARD OF DIRECTORS RECOMMENDATION
AFTER CAREFUL CONSIDERATION, SONIC'S BOARD HAS DETERMINED THAT THE AMENDED
AND RESTATED ASSET PURCHASE AGREEMENT IS ADVISABLE, FAIR TO, AND IN THE BEST
INTERESTS OF, SONIC AND ITS STOCKHOLDERS. ACCORDINGLY, SONIC'S BOARD HAS
UNANIMOUSLY APPROVED THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT AND THE
PROPOSED TRANSACTION, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF
THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT AND THE PROPOSED TRANSACTION,
INCLUDING THE ASSET SALE.
OPINION OF SILVERWOOD PARTNERS LLC
Sonic retained Silverwood to render an opinion to its Board that, based on
and subject to the matters set forth in its opinion, the Consideration (as
defined below) to be received by Sonic from SPA in connection with the Proposed
Transaction of the Desktop Software Business to SPA is fair, from a financial
point of view, to Sonic. The Consideration was determined through negotiations
between Sonic and SPD.
Silverwood has acted as financial advisor to Sonic in connection with the
sale of the Desktop Software Business and will receive a fee for its services, a
substantial portion of which is contingent upon the consummation of the Sale.
Silverwood will also receive a fee for rendering the fairness opinion attached
at Schedule B, which fee was due and payable at the time such opinion was
delivered to the Board.
Silverwood has within the past 24 months been engaged by Sonic (i) to
provide a capability assessment report in connection with certain litigation
between Sonic and the former owners of a constituent business within the Sonic's
Media Services business, (ii) to provide a review of strategic alternatives for
use by the Sonic's management and Board in evaluating alternative approaches for
maximizing shareholder value, (iii) to prepare a valuation of Sonic's Media
Systems business for use by Sonic in determining whether the goodwill associated
with such business had been impaired as of September 30, 2002, and (iv) to act
as the Sonic's financial advisor and render an opinion as to the fairness, from
a financial point of view, of the consideration to be received by Sonic pursuant
to the terms of an asset purchase agreement between Sonic and the prospective
purchaser of Sonic's Media Services business.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the valuation
methodologies utilized by Silverwood. The summary does not purport to be a
complete statement of the analyses and procedures applied, the judgments made or
the conclusion reached by Silverwood or a complete description of its
presentation. Silverwood believes, and so advised Sonic's Board, that its
analyses must be considered as a whole and that selecting
11
portions of its analyses and of the factors considered by Silverwood, without
considering all factors and analyses, could create an incomplete view of the
process underlying Silverwood's analyses and the rendering of the opinion.
On September 25, 2002, Sonic retained Silverwood to assist in the sale of
parts or all of the Desktop Software Business. The Board retained Silverwood
based upon its experience in the valuation of businesses and their securities in
connection with mergers, acquisitions, sales of companies, sales of corporate
divisions and similar transactions. No limitations were imposed by Sonic's Board
on Silverwood with respect to the investigations made or procedures followed by
Silverwood in rendering its opinion.
On April 26, 2003, Silverwood delivered to the Board its written opinion to
the effect that, as of the date of such opinion, and based on and subject to the
limitations described therein, the consideration to be received by Sonic from
SPA in connection with the sale of the Desktop Software Business to SPA,
including cash in the amount of $18,000,000 and the forgiveness of a payable due
to SPD in an estimated amount of $135,000; an estimated total value of
$18,135,000 (collectively, the "Consideration"), is fair, from a financial point
of view, to Sonic.
THE FULL TEXT OF SILVERWOOD'S OPINION, DATED APRIL 26, 2003, WHICH
DESCRIBES AMONG OTHER THINGS THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY SILVERWOOD IN
RENDERING ITS OPINION IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX B AND IS
INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE SILVERWOOD OPINION IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE SILVERWOOD OPINION. SONIC'S STOCKHOLDERS ARE URGED TO, AND SHOULD READ
SILVERWOOD'S OPINION CAREFULLY AND IN ITS ENTIRETY.
The Silverwood opinion does not address Sonic's underlying business
decision to effect the Proposed Transaction and does not constitute a
recommendation to any of Sonic's stockholders as to how a stockholder should
vote with respect to the Proposed Transaction. Silverwood did not make, and was
not requested by Sonic or any other person to make, any recommendations as to
the form or amount of consideration to be received in connection with the
Proposed Transaction. Silverwood was not asked to opine and does not express any
opinion as to: (i) the tax consequences of the Proposed Transaction, including,
but not limited to, tax or legal consequences to Sonic; (ii) the realizable
value of Sonic's common stock or the prices at which Sonic's common stock may
trade in the future following the Transaction, or (iii) the fairness of any
aspect of the Transaction not expressly addressed in Silverwood's fairness
opinion. Silverwood did not perform an independent appraisal of the Desktop
Software Business.
In arriving at its fairness opinion, among other things, Silverwood
undertook the following:
1. Met with certain members of Sonic's senior management to discuss
the operations, financial condition, future prospects and
projected operations and performance of the Desktop Software
Business;
2. Visited the facilities and business offices utilized by the
Desktop Software Business in the United States;
3. Reviewed (i) Sonic's annual reports on Form 10-K for the fiscal
years ended September 30, 2000, 2001 and 2002; and (ii) Sonic's
quarterly reports on Form 10-Q for the quarters ended December
31, 2001, March 31, 2002, June 30, 2002, and December 31, 2002,
which Sonic's management has identified as being the most current
financial statements available;
4. Reviewed certain financial projections prepared by Sonic's
management relating to the Desktop
12
Software Business for the fiscal years ending September 30, 2003,
2004, 2005, 2006, and 2007;
5. Reviewed a draft of this Proxy Statement;
6. Reviewed the historical market prices and trading volume of
Sonic's publicly traded securities;
7. Reviewed certain other publicly available financial data for
certain companies that it deemed comparable to the Desktop
Software Business;
8. Reviewed the Asset Purchase Agreement between Sonic and SPA; and
9. Conducted such other studies, analyses and inquiries as it deemed
appropriate for purposes of its opinion.
The following is a summary of the material analyses and other information
that Silverwood prepared and relied on in delivering its opinion to the Board of
Sonic:
Analyses
Silverwood used several methodologies to assess the fairness, from a
financial point of view, of the Consideration to be received by Sonic in
connection with the Proposed Transaction. These methodologies provided an
estimate as to the aggregate enterprise value of the Desktop Software Business
and its operations on a going-forward basis. The following is a summary of the
material financial analyses used by Silverwood in connection with providing its
opinion.
To determine the estimated value of the Desktop Software Business,
Silverwood obtained a blended valuation indication that was developed from
multiple analytical methodologies including: (i) a comparable company analysis;
(ii) a comparable acquisition analysis; and (iii) a discounted cash flow
analysis. The analyses required studies of overall market and geopolitical
conditions; the consideration of the economic, business and other factors that
affect the industry in which the Desktop Software Business operates; and,
consideration of the historical and future operating results of the Desktop
Software Business.
Comparable Acquisitions Analysis
Silverwood reviewed nine recently completed acquisitions (the "Comparable
Acquisitions") for which the target company was deemed by Silverwood to engage
in a business that was deemed generally comparable to the business of the
Desktop Software Business. Silverwood collected a large number of transactions
by searching filings
13
with the Securities and Exchange Commission, public company disclosures, press
releases; industry and general press reports, databases and other sources and
then applied the following criteria to obtain the best representative sample:
. transactions that were announced between January 1, 2001 and
March 31, 2003; and,
. transactions involving target companies with businesses that were
deemed generally comparable to the Desktop Software Business;
Silverwood analyzed the following transactions:
=======================================================================================
ACQUIRING COMPANY TARGET COMPANY
---------------------------------------------------------------------------------------
Pinnacle Systems, Inc. Steinberg
Sonic Solutions, Inc. Veritas, Inc. Software Desktop and Mobile Division
Apple Computer, Inc. eMagic, Inc.
Roxio, Inc. MGI Software, Inc.
Thomson S.A. Grass Valley Group
ScanSoft Lernout & Hauspie Speech and Language Assets
Pinnacle Systems, Inc. Fast Multimedia, Inc.
Corel Corporation Micrografx
First Virtual Communications, Inc. CUseeMe Networks
---------------------------------------------------------------------------------------
The results of the analysis of the multiples of revenue of these
transactions showed that the multiples of EV to TTM revenues exhibited by the
Comparable Acquisitions ranged from 0.8x to 1.5x with a mean multiple of 1.1x
and a median multiple of 1.1x. Based on fiscal 2002 actual revenue of $15.9
million and management's 2003 revenue estimate of $17.5 million, the resulting
indication of the EV for the Desktop Software Business was approximately $18.4
million.
Discounted Cash Flow Analysis
Silverwood completed a discounted cash flow analysis for the Desktop
Software Business in which the present value of the projected expected future
cash flows of the Desktop Software Business were calculated using forecasted
financial planning data for the Desktop Software Business prepared by Sonic's
management (the "Discounted Cash Flow Analysis"). Silverwood estimated a range
of estimated values for the Desktop Software Business based on the net present
value of the Desktop Software Business Business's expected annual cash flows and
an estimated terminal value for the Desktop Software Business in 2007 calculated
using a multiple of forecasted revenue. Silverwood Partners applied a discount
rate of 25.4% to 30.4% and a range of terminal value multiples of 1.10x to 1.45x
forecasted 2007 revenue. Based on this analysis, the resulting indication of the
enterprise value ranged from approximately $12.1 million to $16.8 million.
The aforementioned Comparable Company, Comparable Acquisition and
Discounted Cash Flow Analyses provided Silverwood with an indication of the EV
of the Desktop Software Business on a going-forward basis in the range of $18.0
million to $20.1 million.
Comparable Company Analysis
Silverwood reviewed certain financial information and valuation ratios of
publicly traded companies that were selected solely by Silverwood with
businesses that were deemed generally comparable to the business of the Desktop
Software Business (the "Comparable Company Analysis"). The group of comparable
companies comprised Apple Computer, Inc., Autodesk, Inc., Avid Technology, Inc.,
Macromedia, Inc., Media 100, Inc., Pinnacle Systems, Inc., Roxio, Inc., Sonic
Solutions, Inc., and SRS Labs, Inc. (the "Comparable Companies"). The Comparable
Companies are a selected group of companies for which digital audio and video
technology composes a substantial portion of the business of each such company.
The Comparable Company Analysis showed that the multiples of enterprise
value ("EV") to trailing twelve month ("TTM") revenues exhibited by the
Comparable Companies ranged from 0.1x to 3.9x with a mean multiple of 1.4x and a
median multiple of 1.5x. Based on the fiscal 2002 actual revenue of $15.9
million and Sonic's 2003 revenue estimate, the resulting indications for the EV
of the Desktop Software Business ranged from approximately $23.4 million to
$25.0 million.
Conclusion
The analyses of Silverwood are not necessarily indicative of actual values
or future results. Analyses relating
14
to the value of companies do not purport to be appraisals or valuations or
necessarily reflect the price at which companies may actually be sold. No
company or transaction used in any analysis for purposes of comparison is
identical to the business or transaction under consideration. Accordingly, an
analysis of the results of the comparisons is not mathematical; rather, it
involves complex considerations and judgments about differences in the companies
to which the Desktop Software Business was compared and other factors that could
affect the value of the Desktop Software Business.
Sonic generally does not publicly disclose forward-looking financial
information. Nevertheless, in connection with its review, Silverwood considered
financial projections for the Desktop Software Business for the fiscal years
ending September 30, 2003, 2004, 2005, 2006 and 2007. The projections were
prepared under market conditions as they existed as of approximately April 25,
2003 and management does not intend to provide Silverwood with any updated or
revised projections in connection with the Proposed Transaction. The projections
do not take into account any circumstances or events occurring after the date
they were prepared. In addition, factors such as industry performance, general
business, economic, regulatory, market and financial conditions, as well as
changes to the financial condition or results of Sonic or the Desktop Software
Business, may cause the projections or the underlying assumptions to be
inaccurate. As a result, projections should not be relied upon as necessarily
indicative of future results, and readers of this Proxy Statement are cautioned
not to place undue reliance on such projections.
In arriving at its fairness opinion, Silverwood reviewed key economic and
market indicators, including, but not limited to, growth in Gross Domestic
Product, inflation rates, interest rates, consumer spending levels,
manufacturing productivity levels, unemployment rates and general stock market
performance. Silverwood's opinion is based on the Desktop Software Business,
economic, market and other conditions as they existed as of April 25, 2003 and
on the projected financial information provided to Silverwood as of such date.
In rendering its opinion, Silverwood has relied upon and assumed, without
independent verification, (i) that the accuracy and completeness of the
financial and other information provided to Silverwood regarding the Desktop
Software Business was prepared on a reasonable basis in accordance with
customary industry practice and reflects the best currently available estimates
and judgment of Sonic's management, (ii) that no material changes have occurred
in the assets, financial condition, business or prospects of Sonic, and the
Desktop Software Business, since the date of the most recent financial
statements that were provided to Silverwood, and (iii) that Sonic's management
was not aware of any information or facts that would make the information
provided to Silverwood incomplete or misleading. Silverwood did not
independently verify the accuracy or completeness of the information supplied to
Silverwood with respect to the Desktop Software Business and does not assume
responsibility for the accuracy or completeness of such information. Silverwood
did not perform any appraisals or valuations of any specific assets or
liabilities of the Desktop Software Business and was not furnished with any such
appraisals or valuations, nor did Silverwood make any physical inspection of any
of the properties or assets of the Desktop Software Business. Silverwood did not
undertake an independent analysis of any pending or threatened litigation,
possible unasserted claims or other contingent liabilities, to which Sonic, the
Desktop Software Business, and any of Sonic's respective affiliates are a party
or may be a subject to and, at Sonic's direction and with Sonic's consent,
Silverwood's opinion makes no assumption concerning, and does not consider, the
possible assertions of claims, outcomes or damages arising out of any such
matters.
Silverwood assumed that Sonic and the Desktop Software Business are not a
party to any pending transaction, including external financings,
recapitalizations, asset sales, acquisitions or merger discussions, other than
the publicly announced plans to sell Media Services, or in the ordinary course
of business. In arriving at its opinion, Silverwood assumed that all the
necessary regulatory approvals and consents required for the Proposed
Transaction would be obtained in a manner that would not affect the
Consideration.
The summary set forth above describes the material points of more detailed
analyses completed by Silverwood in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Silverwood made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Silverwood
believes that its analyses and summary set forth herein must be considered as a
15
whole and that selecting portions of its analyses, without considering all
analyses and factors, or portions of this summary, could create an incomplete
view of the processes underlying the analyses set forth in Silverwood's fairness
opinion. In its analysis, Silverwood made numerous assumptions with respect to
Sonic and the Desktop Software Business, the Proposed Transaction, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the respective entities.
The estimates underlying or included in such analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be more or less favorable than suggested by such analyses. Additionally,
analyses relating to the value of businesses or securities are not appraisals.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.
CONDUCT OF BUSINESS FOLLOWING THE PROPOSED TRANSACTION; USES OF PROCEEDS
If the Proposed Transaction is approved, substantially all of the assets
associated with the Desktop Software Business will be sold to SPA, which will
deemed to be a sale of substantially all of the assets of Sonic pursuant to the
MGCL. Because of the recent sale of the Media Services business, Sonic will have
a continuing operating business, the Media Systems business and plans to use the
proceeds from the Proposed Transaction in the development of that business and
the retirement of certain debts of Sonic.
ABSENCE OF DISSENTERS' RIGHTS OF APPRAISAL
Under the applicable provisions of MGCL, Sonic's stockholders will have no
rights in connection with the Proposed Transaction to seek appraisal for the
fair value of their shares of Common Stock.
ACCOUNTING TREATMENT OF PROPOSED TRANSACTION
If the Proposed Transaction is approved by the stockholders, Sonic will
record the proposed disposition in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" during the quarter ending June
30, 2003.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED TRANSACTION
The Proposed Transaction should have no direct income tax consequences to
Sonic's stockholders. The Proposed Transaction will be reported by Sonic as a
sale of assets for federal income tax purposes in 2003.
SONIC WILL NOT SEEK AN OPINION OF COUNSEL WITH RESPECT TO THE ANTICIPATED TAX
CONSEQUENCES. THE FOREGOING SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
IS INCLUDED FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE TO
ANY STOCKHOLDER. SONIC RECOMMENDS THAT EACH STOCKHOLDER CONSULT HIS OR HER OWN
TAX ADVISER REGARDING THE TAX CONSEQUENCES OF THE PROPOSED TRANSACTION.
CERTAIN INFORMATION CONCERNING SPA
SP Software Acquisition Company, a Delaware corporation, is an indirect
wholly-owned subsidiary of Sony Pictures Digital Inc., a Delaware corporation, a
company that oversees the digital production and online assets of Sony Pictures
Entertainment Inc. (SPE) and consists of four key operating business units: Sony
Pictures Animation, Sony Pictures Imageworks, Sony Online Entertainment and Sony
Pictures Digital Networks, which includes SoapCity, Screenblast, Sony Pictures
mobile and wireless services, the studio's online promotional arm SPiN, and the
UK
16
interactive television service GoPlayTV. SPD's principal executive offices are
located at 6025 Slauson Avenue, Culver City, CA 90231 and its telephone number
is (310) 244-4000. SPD and/or SPA will fund the purchase price from available
working capital.
All information contained in this Proxy Statement relating to SPA has been
supplied by SPA to Sonic.
SONIC FOUNDRY'S CONTINUING MEDIA SYSTEMS BUSINESS
Sonic is in the business of developing automated rich-media application
software and systems. Our advanced publishing tools and media access
technologies operate across multiple digital delivery platforms to significantly
enhance a host of enterprise-based media applications. Sonic's solutions are
based on unique and, in some cases, patented technologies that enhance media
communications through the extensive use of rich-media, defined as a media
element that combines graphics, text, video, audio and metadata in a single data
file. Sonic's technology evolved from a four-year Carnegie Mellon University
research effort funded by major government (DARPA, NSF, NASA) and private
organizations (CNN, Intel, Boeing, Microsoft, Motorola, Bell Atlantic).
Over the last year, Sonic has introduced two versions of its MediaSite Live
(MSL) web presentation and webcasting system to the enterprise marketplace. MSL
addresses a broad variety of communications for business, government, and
education ranging from executive briefings, product marketing, and sales
presentations to public safety/emergency management and community outreach, to
online lectures and distance learning. MSL is a unique combination of hardware
and software that automatically takes multiple media feeds (video, audio and
graphics) from a variety of presentation devices and combines them into an
Internet "stream". This stream can be distributed Live to remote users, as the
presentation is occurring, thereby eliminating the entire authoring process.
Similarly, following the creation of the presentation, the stream is made
accessible on-demand from a website. Sonic's latest engineering effort is
version 3 of MSL which will add further enhancements to the product line
including CD burning, enhanced security, Macintosh browser support, and digital
video capture. Initial product sales have been made to higher learning
institutions, corporations and government.
Sonic is also involved in advanced research related to the interpretation
and further enhancement of rich media. A significant portion of this research is
based on patented technology defined as the integration of speech, language and
image processing (ISLIP) which provides the capability of extracting and
creating metadata from time-based media and includes constructing meaningful
indices enabling effective and efficient search and retrieval of rich media.
This technology was recognized in 2001 by MIT Technology Review as one of the
"Ten Emerging Technologies That Will Change the World". Another patented
technology "video skimming" provides users the capability of reviewing rich
media faster than real-time. With continued funding being received from
government entities, Sonic is actively working towards further commercialization
efforts of these technologies and applying the resulting products to broader
market opportunities. We believe the outcome of our research and
commercialization efforts will advance the art of "meta-tagging" (identification
and extraction of audio, visual and textual cues) as well as "video mining"
technology. This will allow us to offer technologies that both produce and
consume rich-media content at a more personalized and more interactive level.
The markets for Sonic's technologies appear to be expanding dramatically,
according to industry research reports. Jupiter Media Metrix indicates that
enterprises will spend about $567 million on internal streaming media projects
by 2005, with a total market size of $2.8 billion. IDC has reported that in
2003, half of all Internet traffic is made up of audio and video streams. Over
the next few years it is expected that the majority of Internet traffic will be
media streams.
Sonic sells and markets its offerings through a sales force that manages a
reseller channel composed of Value-added resellers, system integrators and
distributors. These third party representatives tend to have a unique
specialization and understanding of both audio/video systems and IT networking.
For this reason, Sonic has chosen to be highly selective and targeted by
bringing on only the most qualified resellers that understand the nuances of
media and IT network issues. To date, Sonic has brought on roughly 40 resellers
who have demonstrated these qualifications.
17
This group is almost entirely based in the United States. As the product
line begins to show growth trends in the U.S. market, Sonic expects to expand
its reseller network to the worldwide market. Besides expanding the resellers of
the product, Sonic also expects business growth to result for the following
reasons-
Product line expansion. Software engineering on the product line continues
to expand the scale and scope of our offerings. Development efforts are targeted
towards enhancing content access and viewing choices. Similarly, some of our
advanced technologies are expected to be incorporated in making our content much
more navigable and searchable, versus non-indexed media content. Fundamentally,
without accurate and full indexes available, viewing media would be analogous to
reading a text book with no chapters, no indexes and no cross references, making
it very time-consuming.
Service contracts. An annual maintenance contract is offered to customers
to maintain version control and provide high level of service. The contracts are
purchased by the majority of the customers and represent 20% of the purchase
price. This recurring annual revenue stream is expected to be a source of income
on top of continuing system sales.
Repeat orders. Most customers will buy a single system to test the full
capability of the system. Larger enterprises and facilities have followed up
with multiple unit orders following a test of the capabilities of the system.
For this reason, Sonic has specifically targeted larger entities that have more
than 500 employees and multiple offices and that have found service provider
solutions in conferencing far too cost prohibitive.
Upgrades. As is typical in the software industry, Sonic expects to offer
product upgrades for a fee to its customer base.
Vertical market expansion. Currently, Sonic realizes the majority of its
revenues from the education and distance learning markets. Corporations
currently lag these users in adoption, but are expected to grow significantly as
market awareness of web presentation and conferencing solutions expands.
Similarly, Sonic is seeing expanded interest from government, professional
membership, legal, medical, engineering and marketing organizations. Targeting
each group specifically offers an opportunity to build new markets as others
become more established.
Marketing efforts span the spectrum of reseller sales demonstrations,
tradeshows, web page information, webinars, brochures, direct mail, print
advertisement and white papers. Sonic is in the early stages of building out its
database of potential customers in the government, education and corporate
marketplaces. We have established a selected process of targeting specific
verticals that have a direct and demonstrated need for our offerings.
The uniqueness of our offering is being received well in a fragmented
market that attempts to solve the web presentation problem in various ways.
Sonic feels it is offering a very unique do-it-yourself solution that combines
hardware and software elements in a system that when deployed in larger
enterprises, provides a 5x or higher return on investment. One aspect to
competition would include service providers. Companies, like Webex, Placeware
(Microsoft), and Raindance charge per minute, per customer fees to allow for
collaboration and web conferencing capabilities. This method becomes extremely
cost-prohibitive when meetings expand beyond a few people. Another competitive
approach involves authoring. This approach, in itself is a narrowed market
opportunity subject to highly specialized skills that an individual requires to
put together an effective presentation. Examples of competitors in this space
include Microsoft, Macromedia and Accordent. Other competitors, such as Virage,
have taken an enterprise approach to webcasting that attempts to sell a full
rich media database and indexing system on top of the webcasting solution. In
our view, this immediately limits the ability to sell in any sort of volume and,
on a cost basis significantly higher than our own offerings.
Our MediaSite Live system, selling for approximately $22,000, offers a
unique hardware and software configuration that allows for web presentations and
webcasts to be performed by a simple press of a button. The engineering put into
the product was intended to eliminate an overly complicated problem that has
restricted market growth and expansion. Sonic believes the breadth of potential
users can grow quite broadly. By way of example, videoconferencing has been a
technology with great promise but minimal demonstrated use. We believe this
market has stalled due to the complexity of actually invoking a videoconference,
the need to have IT staff involved and the uncertainty of quality remote
connections. Even with these handicaps, the video conferencing market has become
a
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billion dollar industry having penetrated less than 10% of the estimated 25
million conference rooms that currently exist worldwide. Our own system offering
is targeted at the same conference room setting and is primarily why we chose
the A/V reseller channel as our primary distribution partner. Because many of
the technology hurdles and use issues have been solved through an IP approach,
Sonic believes the web presentation and webcasting markets will expand far
beyond the established video conferencing market.
Sonic intends to grow with demonstrated business success. Rather than
expanding head count in anticipation of market growth, Sonic plans to manage
cash flow prudently and expand its staffing and engineering as the product line
demonstrates tangible revenue growth and operating cash flow. Expected head
count following the sale of our Desktop Software Business and our Media Services
business is likely to be less than 30. Likewise, as the product expands and
market awareness grows for our offerings, Sonic also believes there will exist
opportunities to merge with or sell the business or portions of the business to
other parties who have a complementary interest and pursuit of the same market
opportunities. However, Sonic has no plans to sell the Media Systems business.
SALE OF MEDIA SERVICES BUSINESS
On May 16, 2003 Sonic completed the sale of the Media Services business for
approximately $5.6 million, including an estimate of the value of net working
capital acquired.
RISK FACTORS RELATING TO SONIC'S BUSINESS AFTER THE PROPOSED TRANSACTION
CERTAIN CAUTIONARY INFORMATION
In connection with the Private Securities Litigation Reform Act of 1995
(the "Litigation Reform Act"), Sonic is hereby disclosing certain cautionary
information to be used in connection with written materials and oral statements
made by or on behalf of its employees and representatives that may contain
"forward-looking statements" within the meaning of the Litigation Reform Act.
Such statements consist of any statement other than a recitation of historical
fact and can be identified by the use of forward-looking terminology such as
"may," "expect," "anticipate," "estimate" or "continue" or the negative thereof
or other variations thereon or comparable terminology. The reader is cautioned
that all forward-looking statements are necessarily speculative and there are
numerous risks and uncertainties that could cause actual events or results to
differ materially from those referred to in such forward-looking statements. The
discussion below highlights some of the more important risks identified by
Sonic, but should not be assumed to be the only factors that could affect future
performance. The reader is cautioned that Sonic does not have a policy of
updating or revising forward-looking statements and thus he or she should not
assume that silence by management over time means that actual events are bearing
out as estimated in such forward-looking statements.
WE HAVE NO MEANINGFUL OPERATING HISTORY WITH OUR REMAINING ASSETS ON WHICH TO
EVALUATE OUR BUSINESS OR PROSPECTS.
Assuming the proposed sale of the Desktop Software Business is completed,
we will only have our Media Systems business remaining. We have only been
engaged in our systems business since October 2001. Accordingly, there is no
significant business history on which you can base an evaluation of our systems
business and its prospects. Our systems business must therefore be evaluated in
light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and evolving markets. These risks include the following with
respect to our systems business:
. substantial dependence on systems with only limited market acceptance;
. need to develop sales and support organizations;
19
. competition;
. need to manage changing operations;
. reliance on strategic relationships; and
. customer concentration.
. dependence on hardware suppliers and reduced gross margins associated
with bundled systems.
WE ANTICIPATE INCURRING LOSSES FOR THE FORESEEABLE FUTURE.
For the six months ended March 31, 2003, the systems business had a gross
margin of just $48,000 on revenues of $391,000 with which to cover sales,
marketing, research, development and general administrative costs. Following the
sale of the Desktop Software Business, we expect our operating losses to
continue for the foreseeable future and there can be no assurance that we will
ever be able to operate profitably.
WE MAY NOT EARN REVENUES SUFFICIENT TO REMAIN IN BUSINESS.
We are proposing to sell the assets relating to the Desktop Software
Business that result in approximately 65 percent of our revenues. In addition,
we recently sold the assets relating to the Media Services business which
comprised approximately 32 percent of our revenues. Accordingly, following
completion of the Proposed Transaction, our ability to generate revenue will be
significantly reduced. Our ability to become profitable depends on whether we
can sell our systems for more than it costs to produce and support them. Our
future sales also need to provide sufficient margin to support our ongoing
operating activities. The success of our revenue model will depend upon many
factors including:
. Our ability to develop and market our systems software operations; and
. The extent to which consumers and businesses use our systems.
Because of the recession in the technology market, the early stage of our
systems software business, and the evolving nature of our business, we cannot
predict whether our revenue model will prove to be viable, whether demand for
our systems will materialize at the prices we expect to charge, or whether
current or future pricing levels will be sustainable.
WE MUST CONTINUALLY DEVELOP NEW SYSTEMS, WHICH APPEAL TO OUR CUSTOMERS.
Our systems are subject to rapid obsolescence and our future success will
depend upon our ability to develop new systems that meet changing customer and
marketplace requirements. There is no assurance that we will be able to
successfully:
. Identify new system opportunities; or
. Develop and introduce systems to market in a timely manner.
We must identify and develop markets for our systems. A suitable market for
our systems may not develop or, if it does develop, it may take years for the
market to become large enough to support significant business opportunities.
Even if we are able to successfully identify, develop, and introduce new
systems, there is no assurance that a suitable market for these systems will
materialize. The following factors could affect the success of our systems and
our ability to address sustainable markets:
. The failure of our business plan to accurately predict the types of
systems the future marketplace will demand;
20
. Our limited working capital may not allow us to commit the resources
required to adequately support the introduction of new systems;
. The failure of our business plan to accurately predict the estimated
sales cycle, price and acceptance of our systems; or
. The development by others of systems that makes our systems
noncompetitive or obsolete.
THERE IS A GREAT DEAL OF COMPETITION IN THE MARKET FOR SYSTEMS SOFTWARE, WHICH
COULD LOWER THE DEMAND FOR OUR SYSTEMS SOFTWARE.
The market for digital media systems is relatively new, and we face
competition from other companies that provide digital media applications.
Companies, like Webex, Placeware (Microsoft), and Raindance offer collaboration
and web conferencing applications, while Microsoft, Macromedia and Accordent
provide authoring capability and other competitors such as Virage offer an
enterprise approach to webcasting that attempts to sell a full rich media
database and indexing system on top of the webcasting solution. If one of these
alternative approaches are received more favorably in the marketplace, a new
approach or technology is developed or a existing or new competitor markets more
effectively than us or we otherwise do not compete effectively, our business
will be harmed. In addition, the more successful we are in the emerging market
for media systems, the more competitors are likely to emerge, including turnkey
media application; streaming media platform developers; digital music
infrastructure providers; and digital media applications service providers
(including for digital musical subscription).
The presence of these competitors could reduce the demand for our systems,
and we may not have the financial resources to compete successfully.
THE CONCENTRATION OF OWNERSHIP BY OUR AFFILIATED STOCKHOLDERS MAY DELAY OR
PREVENT ANY MERGER OR TAKEOVER OF SONIC, WHICH MAY LIMIT THE AMOUNT OF PREMIUM A
STOCKHOLDER WOULD OTHERWISE OBTAIN ON HIS COMMON STOCK.
Certain of our existing stockholders have significant influence over our
management and affairs, which they could exercise against your best interests.
As of May 5, 2003, our officers and directors, together with entities that may
be deemed affiliates of or related to such persons or entities, beneficially
owned over 36% of our outstanding common stock. As a result, these stockholders,
acting together, may be able to influence significantly our management and
affairs and matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Accordingly, this
concentration of ownership may have the effect of impeding a merger,
consolidation, takeover or other business consolidation involving us, or
discouraging a potential acquiror from making a tender offer for our shares.
This concentration of ownership could also adversely affect our stock's market
price or lessen any premium over market price that an acquiror might otherwise
pay.
DUE TO OUR LICENSE AGREEMENT WITH CARNEGIE MELLON UNIVERSITY, WE MAY FACE
COMPETITION IN OUR PUBLISHER(TM) PRODUCT AND WE MAY LOSE THE ABILITY TO SELL
THAT PRODUCT IN THE FUTURE.
On October 15, 2001, Sonic acquired the assets of MediaSite, Inc., (the
"MediaSite Transaction") which provides automated rich media publishing,
management and access solutions. One such solution, our Publisher(TM) product,
is based in part on licensed technology from Carnegie Mellon. As part of the
MediaSite Transaction we acquired a nonexclusive license to use certain
technology in that product and negotiated an exclusive license (the "License
Agreement") as to certain competitors. Because the exclusivity is limited to a
defined list of competitors, a risk exists that Carnegie Mellon could license
the technology to another party that is not currently a named competitor, but
could become competitive with us. Moreover, if the License Agreement were to
terminate before the underlying patents expired, we would lose the ability to
sell the products covered by the License Agreement.
21
TERMS OF THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT
The terms and conditions of the Asset Purchase Agreement, the Amended and
Restated Asset Purchase Agreement, and the Proposed Transaction were the result
of arm's-length negotiations between representatives of Sonic and
representatives of SPD, the parent company of SPA and a U.S. subsidiary of Sony
Pictures Entertainment Inc. The following is a summary of the terms of the
Amended and Restated Asset Purchase Agreement that we believe are material.
However, the description does not contain all of the terms of the Amended and
Restated Asset Purchase Agreement and is qualified in its entirety by reference
to the copy of the Amended and Restated Asset Purchase Agreement attached as
Appendix A to this Proxy Statement and incorporated herein by reference.
Stockholders are urged to read the Amended and Restated Asset Purchase Agreement
in its entirety. Capitalized terms used but not defined herein shall have the
respective meanings set forth in the Amended and Restated Asset Purchase
Agreement.
THE AMENDED AND RESTATED ASSET PURCHASE AGREEMENT
General
Pursuant to the terms of the Amended and Restated Asset Purchase Agreement,
in consideration of the transfer to SPA of substantially all of the Assets
relating to the Desktop Software Business of Sonic, other than Excluded Assets,
SPA has agreed to pay to Sonic an aggregate purchase price $19,000,000 in cash
(the "Purchase Price"), to forgive approximately $135,000 due to SPA by Sonic,
and to assume the Assumed Liabilities, and to purchase 10 MediaSite Live units
from Sonic for a total consideration of approximately $300,000.
The Purchase Price is payable at the Closing by wire transfer in
immediately available funds to Sonic's bank account.
Conditions to the Closing of the Sale
The closing of the Proposed Transaction (the "Closing") is scheduled to
occur on the third business day after the date on which the last of the closing
conditions, including approval of Sonic's stockholders ("Stockholder Approval"),
is satisfied or waived (the "Closing Date"). The obligations of the parties to
consummate the Proposed Transaction are subject to certain customary conditions
such as the accuracy of certain representations and warranties in the Amended
and Restated Asset Purchase Agreement, the performance of the covenants set
forth therein and the absence of certain legal actions or proceedings
prohibiting consummation of any of the transactions contemplated by the Amended
and Restated Asset Purchase Agreement. SPA's obligation to close is also subject
to (i) Sonic having received Stockholder Approval of the Amended and Restated
Asset Purchase Agreement from stockholders representing 2/3 of the shares
eligible to vote, (ii) certain third party consents having been received, (iii)
no Condition - Related Material Adverse Change has occurred on the part of
Sonic, (iv) payment by Sonic of certain indebtedness, (v) certain Sonic
employees having been hired by SPD, provided that this condition to closing will
not apply if SPD fails to offer such employees at a salary consistent with their
present base salary and an employment term of at least one year, and (vi) a
Non-Competition Agreement being entered into between SPA and Sonic, and between
SPA and Monty Schmidt, Sonic's President and Director.
The Purchased Assets and Assumed Liabilities
The Assets to be transferred to SPA are substantially all of the assets of
the Desktop Software Business, including all of Sonic's rights, title and
interest in and to all of the business, properties, assets and rights of any
kind, whether tangible or intangible, real or personal and constituting, or used
in connection with, or related to, the Desktop Software Business owned by Sonic
or in which Sonic has any interest, including, without limitation, all of the
right, title and interest of Sonic in and to (but not including the Excluded
Assets): (i) all trade accounts receivable (whether current or noncurrent),
refunds, deposits, prepayments or prepaid expenses; (ii) all Assigned Contracts
and Contract Rights; (iii) all Assigned Leases, Leasehold Estates and Leasehold
Improvements; (iv) all Tangible Personal Property; (v) all Inventory; (vi) all
Books and Records; (vii) all Intellectual Property; (viii) all Permits; (ix) all
computers and, to the extent transferable, Software Rights; (x) all insurance
benefits, rights and/or proceeds arising from, or related to, the Purchased
Assets or the Assumed Liabilities with respect to periods through the Closing
Date; (xi) all available supplies, sales literature, promotional literature,
customer, supplier and distributor lists and data, art work, display units,
telephone and fax numbers, Customer/User Data and purchasing records; (xii) all
rights under or pursuant to all warranties,
22
representations and guarantees made by suppliers in connection with the
Purchased Assets or services furnished to Sonic pertaining to the Desktop
Software Business or affecting the Purchased Assets; (xiii) all claims, causes
of action, chooses in action, rights of recovery and rights of set-off of any
kind, against any Person, including, without limitation, any Encumbrances or
other rights to payment or to enforce payment in connection with products
delivered by Sonic on or prior to the Closing Date, whether now accrued or
accruing in the future, relating to the Purchased Assets; (xiv) all goodwill and
other intangible rights; and (xv) certain specifically scheduled properties,
assets and rights.
Excluded Assets consist of: (i) the original minute books, stock records
and corporate seals of Sonic; (ii) all personnel records and other records that
Sonic is required by law to retain in original form; (iii) all rights of Sonic
under the Amended and Restated Asset Purchase Agreement or any of the Ancillary
Agreements; (iv) certain scheduled property and assets; (v) all assets that are
not scheduled and that are related solely to Sonic's Media Systems business; and
(vi) the following Subsidiaries and all property and assets used by such
Subsidiaries other than to the extent any such property and assets relate to the
Desktop Software Business or the Purchased Assets: (A) International Image
Services, Inc.; and (B) Sonic Foundry Media Systems, Inc.
Assumed Liabilities consist of: (i) all Liabilities arising after the
Closing Date under the Desktop Software Business, Purchased Assets, Assigned
Contracts and Assigned Leases, but excluding any Liability for any Default under
any such Assigned Contract or Assigned Lease by Sonic or any of its subsidiaries
occurring on or prior to the Closing Date, and excluding any Liabilities related
to the Business and the Purchased Assets that arise during, or relate to,
periods prior to the Closing Date; (ii) any Liability to the customers of Sonic
incurred by Sonic, arising after the Closing Date in the Ordinary Course of
Business for non-delinquent orders of the Purchased Assets outstanding as of the
Closing Date reflected on the Books and Records; (iii) any Liability to the
customers of Sonic incurred by Sonic, arising after the Closing Date under
written warranty agreements given by Sonic in the Ordinary Course of Business
prior to the Closing Date relating to the Desktop Software Business, but not
including any Liability for any Default under any such warranty agreement by
Sonic or any of its subsidiaries and/or occurring on or prior to the Closing
Date; and (iv) certain scheduled accounts payable.
Excluded Liabilities consist of: (i) any Liabilities of any subsidiary of
Sonic, and (ii) except for the Assumed Liabilities, any Liabilities of Sonic,
whether arising out of occurrences prior to, at or after the Closing Date, which
include the following: (a) any liability of Sonic to or in respect of any
employee, former employee or other service provider of Sonic; (b) any Liability
of Sonic in respect of any tax; (c) any Liability of Sonic arising from any
injury to or death of any Person or damage to or destruction of any property,
arising from defects in products manufactured or from services performed by or
on behalf of Sonic on or prior to the Closing Date; (d) any Liability of Sonic
under any Assigned Contract or Assigned Lease (1) arising out of, events or
occurrences on or prior to the Closing Date, (2) that arises after the Closing
Date but that arises out of or relates to any Default by Sonic and/or that
occurred prior to the Closing Date or (3) that was not incurred by Sonic in the
Ordinary Course of Business; (e) any Liability of Sonic under any Contract or
Lease that not is an Assigned Contract or Assigned Lease; (f) any Liability of
Sonic arising out of or resulting from its compliance or noncompliance with any
Law or Order; (g) any Liability of Sonic arising out of or related to any Legal
Proceeding against it or any Legal Proceeding which adversely affects the
Purchased Assets or the Business and which was asserted on or prior to the
Closing Date or to the extent the basis of which arose on or prior to the
Closing Date; (h) any Liability of Sonic resulting from entering into,
performing its obligations pursuant to or consummating the transactions
contemplated by, the Amended and Restated Asset Purchase Agreement; (i) any
Liability of Sonic to or in respect of any former or current stockholders of
Sonic or any other holder of equity interests of Sonic; (j) any Liability of
Sonic relating to any former lending facility; (k) any Liability of Sonic for
any Funded Debt; (l) any Liability of Sonic arising out of any environmental or
health and safety claims, costs or damages or for violation of Environmental
Laws or Occupational Safety and Health Laws pertaining to the Purchased Assets
or the Desktop Software Business, which relate to conditions or events occurring
or commencing prior to the Closing Date; (m) any Liability of Sonic relating to
Sonic's Continuing Business; (n) any Liability of Sonic for any indemnification
obligations pursuant to any claim or notice received prior to the Closing Date
with respect to any Intellectual Property; (o) any Liability of Sonic accruing,
arising out of, or relating to events or occurrences happening on or prior to,
or to periods prior to, the Closing Date; and (p) any Liability that is not an
Assumed Liability.
Representations and Warranties
23
The Amended and Restated Asset Purchase Agreement contains various
representations and warranties of Sonic including, among others, representations
and warranties related to: corporate organization and similar corporate matters;
authorization and enforceability; non-contravention of the Proposed Transaction
of Sonic's charter or bylaws, and non-violation of laws and binding agreements;
consents and approvals; books and records, compliance with laws, licenses and
permits pertaining to the Desktop Software Business; accuracy of financial
statements provided to SPA; Purchased Assets (including good and marketable
title thereto); certain Liabilities; absence of certain changes since March 31,
2003; absence of litigation; condition and title to Assets and properties; taxes
and tax returns; contracts and leases; Intellectual Property and software;
employee benefits; inventory, accounts receivable and accounts payable; related
party transactions; absence of brokers; absence of any other agreements to sell,
assign or transfer the Purchased Assets; disclosure; solvency; fairness opinion;
and settlement of certain litigation.Sonic has made such representations and
warranties as of the date of the Asset Purchase Agreement and the Closing Date,
except that representations and warranties relating to authorization and
enforceability, non-contravention of the Proposed Transaction with Sonic's
charter or bylaws, laws and binding agreements, consents and approvals, absence
of certain changes since March 31, 2003, and absence of any other agreements to
sell, assign or transfer the Purchased Assets are made as of the date of the
Asset Purchase Agreement, the date of the Amended and Restated Asset Purchase
Agreement and the Closing Date.
The Amended and Restated Asset Purchase Agreement contains various
representations and warranties of SPA including among others, representations
and warranties related to: corporate organization and similar corporate matters;
authorization and enforceability; non-contravention of the Proposed Transaction
of SPA's certificate of incorporation or by-laws and non-violation of laws;
consents and approvals; absence of brokers; and absence of legal proceedings
challenging the validity of the Amended and Restated Asset Purchase Agreement.
SPA has made such representations and warranties as of the date of the Asset
Purchase Agreement and the Closing Date, except that representations and
warranties relating to authorization and enforceability, non-contravention of
the Proposed Transaction with SPA's certificate of incorporation or bylaws, laws
and binding agreements and consents and approvals are made as of the date of the
Asset Purchase Agreement, the date of the Amended and Restated Asset Purchase
Agreement and the Closing Date.
The representations and warranties survive the closing until three years
after the Closing Date or, in respect of tax matters, employee benefits,
compliance with applicable law, and environmental matters until after the
expiration of the applicable statutes of limitations, or, in respect of
organization and authority, title to the Purchased Assets, brokers, and certain
intellectual property representations, indefinitely, but not beyond the
statutory term of any applicable trademark, copyright or patent at issue.
Other Transactions
Pursuant to the Amended and Restated Asset Purchase Agreement, Sonic has
agreed that until the Closing Date it will not, directly or indirectly, (i)
sell, assign, lease, pledge, transfer or dispose of all or any portion of the
Purchased Assets, the Desktop Software Business or any material portion or
equity securities of Sonic, whether through merger, consolidation, business
combination, asset sale, share exchange or otherwise (including in connection
with an offer for all or a material portion of Sonic's stock or assets) (each,
an "Acquisition Proposal"), (ii) solicit offers for, offer up or seek any
Acquisition Proposal, (iii) initiate, encourage or provide any documents or
information to any third party in connection with, discuss or negotiate with any
person regarding any inquiries, proposals or offers relating to any Acquisition
Proposal, or (iv) enter into any agreement or discussion with any party with
respect to any Acquisition Proposal, other than SPA. Notwithstanding the above,
Sonic may take certain actions in response to receipt of a superior proposal.
Covenants
Pursuant to the Amended and Restated Asset Purchase Agreement, prior to and
after the Closing, Sonic has agreed (i) to use all reasonable efforts to
effectuate the Amended and Restated Asset Purchase Agreement; (ii) to execute
all documents reasonably necessary or advisable to make effective the Amended
and Restated Asset Purchase Agreement; and (iii) cooperate with SPA in
connection with the foregoing. Promptly after execution of the Amended and
Restated Asset Purchase Agreement and prior to the Closing, Sonic has agreed (A)
to make all filings requires by Law to consummate the Proposed Transaction, and
(B) obtain all Consents and Permits necessary to consummate the Proposed
Transaction. Prior to the Closing, Sonic has also agreed (1) to make all filings
and give all notices necessary to consummate the Amended and Restated Asset
Purchase Agreement; (2) to conduct the Desktop Software Business in the ordinary
course; (3) to not take any action inconsistent with the Amended and Restated
Asset Purchase Agreement or any Ancillary Agreement or the consummation of the
Proposed Transaction; (4) to use its best efforts to maintain the Purchased
Assets in a state of repair and condition that complies with laws and is
consistent with the requirements of the Desktop Software Business as it is
presently conducted; (5) to cooperate with SPA to obtain all consents; (6) to
notify SPA of the breach of any representations or warranty, covenant, condition
or agreement contained in the Amended and Restated Asset Purchase Agreement; (7)
to terminate immediately prior to closing all employees hired by SPA; (8) to
recommend that the stockholders vote in favor of the Proposed Transaction and to
use its best efforts to solicit from the stockholders proxies in favor of such
matters and to obtain the Stockholder Approval, unless (A) Sonic receives a
superior Proposal, (B) SPA does not offer to revise the terms of the Proposed
Transaction to provide terms more favorable, and (C) the Board determines, in
good faith
24
after consultation with a financial advisor and with the advice of counsel, that
its failure to recommend such Competing Proposal would constitute a breach of
fiduciary duty; and (9) to call and hold a meeting of its stockholders as
promptly as reasonably practicable for the purpose of voting upon the adoption
of the Amended and Restated Asset Purchase Agreement and the Proposed
Transaction and obtaining the Stockholder Approval which obligation shall exist
irrespective of the presence of a Superior Proposal and the withdrawal of the
Board of Director's recommendation of the Proposed Transaction. The Board may
withhold or withdraw its recommendation that the stockholders of Sonic vote in
favor of the approval of the Proposed Transaction in response to a receipt of a
Superior Proposal that continues to be a Superior Proposal after Sonic has
complied with certain requirements regarding such proposal.
Agreement Not to Compete
With certain limitations, Sonic has agreed that, for a period of two full
years after the Closing Date, it shall not and will ensure that its
subsidiaries do not, directly or indirectly,: (i) engage in a competing business
anywhere in the world where the Desktop Software Business is conducted whether
such engagement shall be as owner, partner, agent, consultant or stockholder
(except as the holder of not more than three percent of the outstanding shares
of a corporation whose stock is listed on any national or regional securities
exchange or reported by the National Association of Securities Dealers Automated
Quotation System or any successor thereto); (ii) solicit the employment of or
hire any person who is an employee or independent contractor of SPA or its
Affiliates; (iii) solicit any Person who is a customer of the Desktop Software
Business in respect of the Desktop Software Business; (iv) induce or attempt to
induce any customer, supplier, licensor, licensee or business relation of SPD or
any of its affiliates to cease doing business with SPA or in any way interfere
with such relationship; or (v) to SPA or any of its Affiliates.
Voting Agreement
Certain directors and executive officers of Sonic and certain of their
affiliates collectively hold approximately 27% of Sonic's outstanding stock,
have entered into a voting agreement with SPA as of the date of the Asset
Purchase Agreement (which agreement was amended concurrently with the Amended
and Restated Asset Purchase Agreement). Until the earlier of the closing of the
Proposed Transaction or termination of the Amended and Restated Asset Purchase
Agreement, such stockholders have agreed to vote all of their shares to approve
the Amended and Restated Asset Purchase Agreement and the Proposed Transaction,
and vote against (i) any action or agreement that will result in any breach of
representation, warranty or covenant of Sonic under the Amended and Restated
Asset Purchase Agreement or any Ancillary Agreement, (ii) any extraordinary
corporate transaction by Sonic involving the Desktop Software Business, (iii)
any sale or transfer of the Purchased Assets (other than in the ordinary
course), (iv) any change in the executive officers, the Board, corporate
structure, capitalization, charter or bylaws of Sonic and (v) any action that is
intended or could reasonably be expected to materially impede, interfere with,
delay, postpone or adversely affect the approval of the Amended and Restated
Asset Purchase Agreement and the Proposed Transaction.
Indemnification
Sonic has agreed to indemnify and hold harmless SPA and its directors,
officers, employees, affiliates, controlling persons, agents and representatives
and their successors and assigns from and against all Losses as a result of or
arising out of (i) a breach of any representation or warranty of Sonic, (ii) the
breach of or failure to perform any covenant or agreement of Sonic, (iii) all
Excluded Liabilities, (iv) any and all Liabilities and obligations other than
Assumed Liabilities, and (v) certain liabilities imposed upon SPA by reason of
SPA's decision not to hire certain of Sonic's employees, (vi) all Liabilities
arising under Employee Plans, (vii) all Liabilities with respect to Sonic's
employees, former employees or service providers relating to acts or omissions
which occurred on or prior to the Closing Date, (viii) all Liabilities for
Environmental Damages, (ix) all Liabilities for products shipped or manufactured
by, or any services provided by Sonic prior to the Closing Date, (x) claims for
broker fees, and (xi) any failure of Sonic to comply with applicable bulk sales
laws.
SPD and SPA have agreed to indemnify and hold harmless Sonic, and its
directors, officers, employees, affiliates, controlling persons, agents and
representatives and their successors and assigns from and against all Losses as
a result of or arising out of (i) a breach of any representation or warranty of
SPA, (ii) the breach of or failure to perform any covenant or agreement of SPA,
(iii) after the Closing, the Assumed Liabilities or (iv) any Liabilities with
respect to the Rehired Employees, but only to the extent such liability arises
from action, taken by SPA after the Closing Date.
25
Pursuant to the Amended and Restated Asset Purchase Agreement, no
indemnification shall be available to Indemnified Parties for Losses arising
solely from a breach of any representation or warranty until the aggregate
amount of such Loss exceeds $265,000, and then to the full extent of such Losses
in excess of $265,000 not to exceed $15,770,000. Certain Losses which are
indemnifiable by Sonic are not subject to such limitations.
Holdback
Sonic has agreed that SPA may hold back $500,000 of the Consideration which
amount is payable to SPA for any Losses incurred by SPA or that SPA sustains in
connection with, arising out of, resulting from or incident to any breach of
representations, warranties, or covenants relating to the Settlement Agreements
or the failure by Sonic to fulfill all of its obligations under the Settlement
Agreements. The holdback amount is payable immediately to SPA's account for any
such Losses and any holdback amount that is remaining after the Nova Completion
Date which has not been paid, credited or reserved for SPA will be released to
Sonic. The holdback does not apply if the Nova Completion Date occurs before the
Closing Date.
Expenses
Each party has agreed to bear its own fees and expenses in respect of the
Proposed Transaction.
Termination
The Amended and Restated Asset Purchase Agreement may be terminated at any
time prior to the Closing: (i) by mutual written consent of SPA and Sonic; (ii)
by either SPA or Sonic: (A) if the Closing shall not have been consummated by
September 30, 2003, subject to extension by either party to November 30, 2003
(the "Outside Date"), if the Proxy Materials have not been cleared by the
Securities and Exchange Commission, any comments or requests relating to the
Proxy Materials by the Securities and Exchange Commission cause a delay in the
mailing of the Proxy Materials to Sonic's stockholders, a delay in the
Stockholders Meeting, or a delay in the Closing, or certain conditions to
Closing are not fully satisfied, including: representations, warranties and
covenants are not correct, certain actions or court orders are outstanding and
have not been dismissed; Sonic's Board of Directors resolutions authorizing the
Proposed Transaction have not been received by SPA; certain permits, consents,
approvals and waivers have not been obtained by Sonic; and Sonic has not
provided to SPA evidence of payment of certain indebtedness; provided that, in
each case, the terminating or extending party may not be in default of the
Amended and Restated Asset Purchase Agreement, or have caused the failure of the
Proposed Transaction to have occurred on or before such date; or (B) if certain
orders prohibiting the Proposed Transaction shall be in effect and shall have
become final and nonappealable; (iii) by SPA, if Sonic shall have breached or
failed to perform in any material respect any of its representations,
warranties, covenants or other agreements contained in the Amended and Restated
Asset Purchase Agreement, which breach or failure to perform would give rise to
a Condition-Related Material Adverse Effect, and has not been cured; (iv) by
Sonic, if SPA shall have breached or failed to perform in any material respect
any of its representations, warranties, covenants or other agreements contained
in the Amended and Restated Asset Purchase Agreement, which breach or failure to
perform would give rise to a Condition-Related Material Adverse Effect, and has
not been cured; or (v) by SPA if (A) Sonic's Board of Directors shall have
withdrawn or adversely modified its recommendations to its stockholders to vote
in favor of the Proposed Transaction, (B) Sonic's Board recommends or approves,
or determined to recommend or approve, to the stockholders, any Acquisition
Proposal other than the Proposed Transaction (C) there is a tender or exchange
offer for more than 20% of Sonic's stock and Sonic's Board of Directors does not
recommend rejection of the tender or exchange offer, or (D) if Sonic fails to
call or hold the Stockholders meeting by the fifth day prior to the Outside
Date; (vi) by Sonic, if its Board of Directors accepts a Superior Proposal and
the stockholders of Sonic do not approve the Amended and Restated Asset Purchase
Agreement and the Proposed Transaction at a duly convened meeting; or (vii) by
Sonic or SPA if the Stockholder Approval is not obtained.
Effect of Termination
In the event the Amended and Restated Asset Purchase Agreement is
terminated by SPA pursuant to clause (v) above, Sonic shall pay SPA within two
business days of such termination $950,000 in immediately available funds, and
all of SPA's reasonable expenses incurred in connection with the Asset Purchase
Agreement, the Amended and Restated Asset Purchase Agreement, and the Proposed
Transaction, and all Losses and all other amounts in connection with any action
taken by SPA or its affiliates in connection with enforcing its rights under the
Amended and Restated Asset Purchase Agreement or any Ancillary Agreement, and in
connection with any legal action or claims arising out of or in connection with
the Amended and Restated Asset Purchase Agreement or any Ancillary Agreement
(collectively, "SPA's Expenses") within two days of SPA's itemization of such
expenses. In the event the Amended and Restated Asset Purchase Agreement is
terminated by Sonic pursuant to clause (vi) above, Sonic shall pay SPA
immediately and as a condition precedent to the effectiveness of such
termination $950,000 in immediately available funds, and SPA's Expenses within
two days of SPA's itemization of such expenses. In the event the Amended and
Restated Asset Purchase Agreement is terminated because the Stockholder Approval
has not been obtained, pursuant to clause (vii) above, and (i) an Acquisition
Proposal has been publicly announced prior to the Stockholders Meeting and not
expressly and publicly withdrawn, and (ii) a Competing Transaction has been
consummated or Sonic enters into a definitive agreement regarding a Competing
Transaction within twelve (12) months following termination
26
of the Amended and Restated Asset Purchase Agreement, Sonic shall pay SPA
$950,000 in immediately available funds and SPA's Expenses.
Liquidated Damages
Sonic is required to pay SPA liquidated damages in the amount of
$5,000,000, if, prior to Closing, (i) Sonic intentionally or knowingly
materially breaches its covenants regarding further assurances, conduct of
business, stockholders meeting or the proxy statement, and such material breach
is either intended to, or Sonic knew such material breach was reasonably likely
to, cause (either in whole or in part) the transactions contemplated by the
Amended and Restated Asset Purchase Agreement (A) not to be consummated, (B) not
to be able to be consummated or (C) to be delayed through the Outside Date, or
(ii) Sonic materially breaches the no-shop clause of the Amended and Restated
Asset Purchase Agreement. The Amended and Restated Asset Purchase Agreement
provides that this liquidated damages provision shall not be triggered where the
breach of the no-shop provision is Sonic's failure to notify SPA of Sonic's
receipt of any inquiry, information, request or other proposal to the extent
that such inquiry, information request or other proposal was not, at any time,
received by, or communicated to, an officer, director, attorney or advisor of
Sonic, or other Representative of Sonic with authority to act on such inquiry,
request or proposal.
Other Agreements
Concurrently with the execution of the Amended and Restated Asset Purchase
Agreement, the parties also amended certain consulting and global agreements
with SPD, (i) to provide that in the event of a "change in control" in Sonic
(other than one where SPD purchases the desktop software assets), as defined in
the amendments, or a material breach by Sonic of the amendment terms, SPD will
receive a non-exclusive, but perpetual and unlimited license to the object and
source code of Vegas 4.0 + DVD and (ii) to require Sonic to place the source
code for Vegas 4.0 + DVD into the pre-existing source code escrow. In connection
with the Amended and Restated Asset Purchase Agreement, the parties agreed that
at Closing, they will enter into an agreement pursuant to which SPA agrees to
purchase 10 MediaSite Live units from Sonic for a total consideration of
approximately $300,000.
Share Ownership of Directors and Executive Officers
The directors and executive officers of Sonic and certain of their
affiliates, who together own approximately 27% of the shares entitled to vote at
the Annual Meeting, have agreed with SPD to vote their shares in favor of the
Proposed Transaction and the Amended and Restated Asset Purchase Agreement and
against any proposal or action that could interfere with or impede the Proposed
Transaction.
SELECTED FINANCIAL DATA
The selected financial and operating data as of and for the years ended
September 30, 2002, 2001, 2000, 1999 and 1998 were derived from our financial
statements that have been audited. The selected financial data as of and for the
six months ended March 31, 2003 were derived from our financials that have not
been audited. The selected financial data set forth below is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our financial
statements and notes thereto appearing elsewhere in the annual report on Form
10-K for the year ended September 30, 2002 and the report on Form 10-Q for the
period ended March 31, 2003.
Six Months Years Ended September 30,
---------- -------------------------
Ended
-----
(in thousands except per share data) 3/31/03 2002 2001 2000 1999 1998
------- ---- ---- ---- ---- ----
(unaudited)
Statement of Operations Data:
Total net revenues $ 12,387 $ 26,156 $ 26,284 $ 26,307 $ 13,682 $ 7,470
Total cost of revenues 4,995 10,585 12,920 10,670 3,390 2,028
Gross profit 7,392 15,571 13,364 15,637 10,292 5,442
Selling and marketing expenses 4,208 8,803 12,554 19,822 9,336 3,231
General and administrative expenses 3,285 6,979 10,153 9,982 4,253 1,878
Product development expenses 2,890 7,231 7,986 7,868 2,875 1,046
Restructuring and impairment charge - - 4,973 - - -
Amortization of goodwill - - 27,478 14,300 - -
Cumulative effect of change in
accounting principle - 44,732 - - - -
Net loss (5,452) (56,737) (49,860) (34,922) (5,997) (632)
Pro forma loss per common share:
Basic and diluted $ (.20) $ (2.12) $ (2.25) $ (1.89) $ (1.06) $ (.22)
Weighted average common shares 27,744 26,812 22,129 18,503 5,687 2,713
(in thousands except per share data) March 31, September 30,
--------- -------------
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
(unaudited)
Balance Sheet Data:
Cash and cash equivalents $ 1,233 $ 3,704 $ 7,809 $ 21,948 $ 5,889 $ 9,940
Working capital (deficit) (4,030) (496) 4,421 22,153 8,843 11,156
Total assets 22,379 27,643 71,683 126,825 16,709 15,950
Total indebtedness 6,262 5,379 5,989 8,409 5,283 714
Stockholders' equity 12,707 17,984 61,231 110,366 8,747 14,091
PER SHARE DATA
Historical Pro Forma
---------- ---------
Book Value Per Share at March 31, 2003 $ (0.46) $ (0.85)
Net loss per common share -basic and diluted for the
six months ended March 31, 2003 $ (0.20) $ (0.12)
Net loss per common share before cumulative effect of
change in accounting principle -basic and
diluted for the year ended September 30, 2003 $ (0.45) $ (0.31)
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial statements relate to the
proposed sale of the Desktop Software Business under the terms of the Proposed
Transaction and to the completed sale of the Media Services business, completed
May 16, 2003.
Sonic's fiscal year ends on September 30. The following Unaudited Pro Forma
Consolidated Balance sheet as of March 31, 2003 reflects the historical
financial position with pro forma adjustments as though the businesses had been
disposed on March 31, 2003.
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended September 30, 2002 and the six months ended March 31, 2003 reflect the
historical financial performance with pro forma adjustments as though the sales
were consummated at the beginning of the fiscal year ended September 30, 2002.
The Pro Forma Consolidated Statements of Operations are based on the
following:
1) historical consolidated results of operations and segment data of
Sonic for the fiscal year ended September 30, 2002 derived from
audited financial statements included in the Sonic Foundry 2002 annual
report on Form 10-K;
2) historical consolidated results of operations of Sonic for the six
months ended March 31, 2003 derived from unaudited financial
statements and management's discussion and analysis included in the
report on Form 10-Q filed for the quarter ended March 31, 2003;
3) historical internal consolidating financial statements for the periods
presented; and
4) estimated allocations of corporate overhead and other administrative
functions.
The Pro Forma Financial Statements and the accompanying notes ("Pro Forma
Financial Information") should be read in conjunction with, and are qualified
by, the historical financial statements and notes thereto of Sonic.
The Pro Forma Financial Information is intended for informational purposes
only and is not necessarily indicative of the results that would have occurred
had the dispositions occurred at the beginning of each fiscal year or on March
31, 2003; nor is the information necessarily indicative of results that may
occur in the future.
Sonic Foundry, Inc.
Unaudited Pro Forma Balance Sheet
As of March 31, 2003
Pro
Media Desktop Forma
Consoli- Services Software Adjust- Pro
dated (1) (2) ments Forma
---------- ---------- ---------- ---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 1,233 $ 5,180 (a) $ 17,540 (d) $ (8,071) (g) $ 15,982
Accounts receivable, net 3,303 (1,814) (b) (1,224) (e) - 265
Accounts receivable, other 127 (4) (b) (30) (e) - 93
Inventory 403 (86) (b) (317) (e) - -
Prepaid expenses and other current assets 405 (84) (b) (146) (e) - 175
---------- ---------- ---------- ---------- ----------
Total current assets 5,471 3,192 15,823 (8,071) 16,415
Property and equipment:
Buildings and improvements 2,477 (1,556) (b) (921) (e) - -
Equipment 13,290 (8,623) (b) (3,879) (e) - 788
Furniture and fixtures 573 (174) (b) (304) (e) - 95
---------- ---------- ---------- ---------- ----------
Total property and equipment 16,340 (10,353) (5,104) - 883
Less accumulated depreciation (9,241) 5,283 (b) 3,475 (e) - (483)
---------- ---------- ---------- ---------- ----------
Net property and equipment 7,099 (5,070) (1,629) - 400
Other assets:
Goodwill and other intangibles, net 8,230 (479) (b) - - 7,751
Capitalized software development costs, net 1,133 (100) (b) - - 1,033
Debt issuance costs 408 - - (408) (h) -
Other assets 38 - (38) (e) - -
---------- ---------- ---------- ---------- ----------
Total other assets 9,809 (579) (38) (408) 8,784
---------- ---------- ---------- ---------- ----------
Total assets $ 22,379 $ (2,457) $ 14,156 $ (8,479) $ $25,599
========== ========== ========== ========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,134 $ (375) (b) $ (672) (e) $ - $ 1,087
Accrued liabilities 1,276 (68) (b) (172) (e) (350) (g) 686
Current portion of long-term debt and capital
lease obligations 1,653 (324) (b) - (1,218) (g) 111
Convertible debt, net of discount 4,438 - - (4,438) (g)(h) -
---------- ---------- ---------- ---------- ----------
Total current liabilities 9,501 (767) (844) (6,006) 1,884
Long-term obligations, net of current portion
33 (33) (b) - - -
Capital lease obligations, net of current portion
10 (6) (b) (4) (e) - -
Other liabilities 128 - - - 128
Stockholders' equity:
Common stock 278 - - - 278
Additional paid-in capital 167,070 - - - 167,070
Accumulated deficit (154,437) (1,651) (c) 15,004 (f) (2,473) (i) (143,557)
Receivable for common stock issued (26) - - - (26)
Cummulative foreign currency translations (10) - - - (10)
Unearned compensation (18) - - - (18)
Treasury stock, at cost, 27,750 shares (150) - - - (150)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity 12,707 (1,651) 15,004 (2,473) 23,587
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 22,379 $ (2,457) $ 14,156 $ (8,479) $ 25,599
========== ========== ========== ========== ==========
Sonic Foundry, Inc.
Unaudited Pro Forma Statement of Operations
For the Year Ended September 30, 2002
(dollars in thousands, except per
share data)
Consoli- Media Desktop Pro Forma Pro
dated Services Software Adjustments Forma
----------- ---------- ---------- ----------- -----------
Revenue:
Software license fees $ 16,757 $ - $ (15,898) (j) $ - $ 859
Media services 9,399 (9,399) (j) - - -
----------- ---------- ---------- ---------- -----------
Total revenue 26,156 (9,399) (15,898) 859
Cost of revenue:
Cost of software license fees 3,371 (2,991) (j) - 380
Cost of media services 7,214 (7,214) (j) - - -
----------- ---------- ---------- ---------- -----------
Total cost of revenue 10585 (7,214) (2,991) - 380
----------- ---------- ---------- ---------- -----------
Gross margin 15,571 (2,185) (j) (12,907) (j) - 479
Operating expenses:
Selling and marketing expenses 8,803 (1,802) (k) (4,453) (k) - 2,548
General and administrative expenses 6,979 (2,718) (l) (1,533) (l) - 2,728
Product development expenses 7,231 (439) (k) (3,713) (m) - 3,079
----------- ---------- ---------- ---------- -----------
Total operating expense 23,013 (4,959) (9,699) - 8,355
----------- ---------- ---------- ---------- -----------
Loss from operations (7,442) 2,774 (3,208) - (7,876)
Other income (expense):
Interest expense (606) 84 (k) 19 (k) 467 (o) (36)
Non-cash interest expense (3,409) - - 3,409 (o) -
Interest and other income (536) (43) (k) (2) (k) 142 (p) (439)
----------- ---------- ---------- ---------- -----------
Total other income (expense) (4,551) 41 17 4,018 (475)
----------- ---------- ---------- ---------- -----------
Loss before income taxes and cumulative effect of
change in accounting principle (11,993) 2,815 (3,191) 4,018 (8,351)
Income taxes (12) 13 (k) (1) (k) - -
----------- ---------- ---------- ---------- -----------
Loss before cumulative effect of
change in accounting principle $ (12,005) $ 2,828 $ (3,192) $ 4,018 $ (8,351)
=========== ========== ========== ========== ===========
Net loss per common share before cumulative effect
of change in accounting principle -basic and
diluted $ (0.45) $ (0.31)
=========== ===========
Denominator for basic and dilutive loss per share
- weighted average common shares 26,812,000 26,812,000
Sonic Foundry, Inc.
Unaudited Pro Forma Statement of Operations
For the Six Months Ended March 31, 2003
(dollars in thousands, except per
share data)
Consoli- Media Desktop Pro Forma Pro
dated Services Software Adjustments Forma
----------- ---------- ---------- ----------- -----------
Revenue:
Software license fees $ 8,442 $ - $ (8,051) (n) $ - $ 391
Media services 3,945 (3,945) (n) - - -
----------- ---------- ---------- ---------- -----------
Total revenue 12,387 (3,945) (8,051) 391
Cost of revenue:
Cost of software license fees 1,729 (1,386) (n) - 343
Cost of media services 3,266 (3,266) (n) - - -
----------- ---------- ---------- ---------- -----------
Total cost of revenue 4,995 (3,266) (1,386) - 343
----------- ---------- ---------- ---------- -----------
Gross margin 7,392 (679) (n) (6,665) (n) - 48
Operating expenses:
Selling and marketing expenses 4,208 (712) (k) (2,009) (k) - 1,487
General and administrative expenses 3,285 (1,204) (l) (932) (l) - 1,149
Product development expenses 2,890 (163) (k) (1,921) (m) - 806
----------- ---------- ---------- ---------- -----------
Total operating expense 10,383 (2,079) (4,862) - 3,442
----------- ---------- ---------- ---------- -----------
Loss from operations (2,991) 1,400 (1,803) - (3,394)
Other income (expense):
Interest expense (554) 29 (k) 3 515 (o) (7)
Non-cash interest expense (2,006) - - 2,006 (o) -
Interest and other income 10 (9) (k) - 59 (p) 60
----------- ---------- ---------- ---------- -----------
Total other income (expense) (2,550) 20 3 2,580 53
----------- ---------- ---------- ---------- -----------
Loss before income taxes (5,541) 1,420 (1,800) 2,580 (3,341)
Income taxes 89 (89) (k) - - -
----------- ---------- ---------- ---------- -----------
Net loss $ (5,452) $ 1,331 $ (1,800) $ 2,580 $ (3,341)
----------- ---------- ---------- ---------- -----------
Net loss per common share -basic and diluted $ (0.20) $ (0.12)
=========== ===========
Denominator for basic and dilutive loss per share
- weighted average common shares 27,743,519 27,743,519
SONIC FOUNDRY, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) To record the May 16, 2003 disposition of the Media Services business to
Deluxe Media Services, Inc. ("Deluxe"), (the "Media Services
Transaction").
(2) To record the Proposed Transaction with SPA;
(3) Collectively (the "Dispositions").
a) Estimated cash impact of the Media Services Transaction includes:
i. $5.2 million received on May 16, 2003.
ii. Estimated $400,000 of additional proceeds - related to 40% working
capital holdback - expected to be received in September 2003.
iii. Estimated $400,000 of transaction costs including commissions,
professional fees and severance payments.
b) Amounts include:
i. Assets purchased by Deluxe.
ii. Intangible assets written off upon disposal of the Media Services
business.
iii. Liabilities assumed by Deluxe.
iv. Debt retired upon disposal of the Media Services business.
c) Estimated loss on disposal of the Media Services business if the Media
Services Transaction had occurred on March 31, 2003.
d) Estimated cash impact of the Proposed Transaction with SPA includes:
i. $19 million purchase price.
ii. Estimated $1.5 million of transaction costs including commissions,
professional fees and severance payments.
e) Amounts include:
i. Assets purchased by SPA.
ii. Liabilities assumed by SPA.
f) Estimated gain on disposal of the Desktop Software business if the Proposed
Transaction had occurred on March 31, 2003.
g) Debt payments and writeoffs to be made upon consummation of the Proposed
Transaction include:
------------------------------------------------------------------------------------------------
Convertible Aris Employee Deferred
Debt Buinevicius Compensation Plan Total
------------------------------------------------------------------------------------------------
Cash $ (6,603) $ (1,250) $ (218) $ (8,071)
------------------------------------------------------------------------------------------------
Debt Issuance Costs (408) (408)
------------------------------------------------------------------------------------------------
Accrued liabilities 100 250 350
------------------------------------------------------------------------------------------------
Current portion of
long-term debt and
capital lease obligations 5,912 1,000 218 7,130
------------------------------------------------------------------------------------------------
Convertible debt, net of
discount (1,474) (1,474)
------------------------------------------------------------------------------------------------
Retained Earnings (loss
on early retirement of
debt) 2,473 2,473
------------------------------------------------------------------------------------------------
-
------------------------------------------------------------------------------------------------
h) See Table above in (g)
i) Estimated loss on the early retirement of the convertible debt and writeoff
of related unamortized debt issuance costs and debt discount.
j) As reported in the segment data disclosure of the Fiscal 2002 audited
financial statements.
k) Amounts derived from Sonic's internal consolidating statements of
operations for the period.
l) Amounts derived from Sonic's internal consolidating statements of
operations with adjustments for allocation of corporate overhead based on
pro rata revenue and headcounts.
m) Amounts derived from Sonic's internal consolidating statements of
operations with adjustments for allocation of corporate product development
costs using current staff assignments.
n) As reported in Management's Discussion and Analysis of the report on Form
10-Q filed for the quarter ended March 31, 2003.
o) Because substantially all debt will be paid off with proceeds from the
Dispositions, these adjustments assume:
i. For fiscal 2002, that the convertible debt transaction did not
occur.
ii. For six months ended March 31, 2003, that the convertible debt was
paid off at the beginning of the fiscal year and that the bridge
note with Aris Buinevicius did not occur.
p) Adjustments for interest income (based upon average money market rates) on
available cash based upon proceeds from the Dispositions and debt
repayments assuming the Dispositions had occurred at the beginning of the
fiscal year.
RECOMMENDATION OF BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF SONIC BELIEVES THAT THE PROPOSED TRANSACTION IS
IN THE BEST INTERESTS OF, AND IS FAIR TO, SONIC AND ITS STOCKHOLDERS. THE BOARD
OF DIRECTORS UNANIMOUSLY APPROVED THE PROPOSED TRANSACTION, AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE PROPOSED TRANSACTION
AT THE ANNUAL MEETING.
PROPOSAL 2:
APPROVAL OF AMENDMENT TO SONIC'S CHARTER UPON THE DETERMINATION BY
SONIC'S BOARD OF DIRECTORS TO EFFECT A REVERSE STOCK SPLIT OF ITS
COMMON STOCK AT A RATIO OF ONE-FOR-TEN AT ANY TIME PRIOR TO
JUNE 1, 2004.
General
As of June 3, 2003, our aggregate market capitalization was approximately
$18,000,000 - 27,784,509 shares of our common stock outstanding at $0.65 per
share. In order to reduce the number of shares of common stock outstanding, the
Board of Directors has unanimously adopted a resolution seeking stockholder
approval to grant the Board of Directors authority to amend our charter to
effect a reverse split of our common stock. The ratio of the reverse stock split
that the Board of Directors approved and deemed advisable and for which it is
seeking stockholder approval is one-for-ten. Approval of this reverse stock
split proposal would give the Board of Directors authority to implement the
reverse stock split at any time it determined prior to June 1, 2004. In
addition, approval of this reverse stock split proposal would also give the
Board of Directors authority to decline to implement a reverse stock split prior
to such date or at all.
If our stockholders approve the reverse stock split proposal and the Board
of Directors decides to implement the reverse stock split, we will file an
amendment to our charter with the Secretary of State of the State of Maryland
(as described below) which will effect a reverse split of the shares of our
common stock then issued and outstanding in the ratio of one-for-ten. The
reverse stock split, if implemented, would not change the number of authorized
shares of common stock or preferred stock or the par value of our common stock
or preferred stock. Except for any changes as a result of the treatment of
fractional shares, each stockholder will hold the same percentage of common
stock outstanding immediately prior to the reverse stock split as such
stockholder did immediately prior to the split.
Purpose
Following the 2 for 1 stock split of our common stock, which we implemented
on April 28, 2000, various equity raises and three company acquisitions
completed in fiscal 2000, we had over 21,654,000 shares of common stock
outstanding. Since that time, market prices for stocks trading in the U.S.
markets have declined substantially.
27
For example, the closing price for the S&P 500 Index has decreased from 1,432.63
on May 1, 2000 to 971.56 on June 3, 2003. Since fiscal 2000, the number of
shares of our outstanding common stock has grown. In order to reduce the number
of shares of our common stock outstanding and thereby attempt to proportionally
raise the per share price of our common stock, the Board of Directors believes
that it is in the best interests of our stockholders for the Board of Directors
to obtain the authority to implement a reverse stock split.
The Board of Directors is also seeking stockholder approval of the
authority to implement a reverse stock split because it believes that a higher
stock price may help generate investor interest in Sonic and help us attract and
retain employees and other service providers. The Board of Directors believes
that institutional investors and investment funds are generally reluctant to
invest in lower priced stocks. Accordingly, the Board of Directors concluded
that reducing the number of outstanding shares of our common stock might be
desirable in order to attempt to support a higher stock price per share based on
our current market capitalization. In addition, the Board of Directors
considered that our common stock might not appeal to brokerage firms that are
reluctant to recommend lower priced securities to their clients. Investors may
also be dissuaded from purchasing lower priced stocks because the brokerage
commissions, as a percentage of the total transaction, tend to be higher for
such stocks. Moreover, the analysts at many brokerage firms do not monitor the
trading activity or otherwise provide research coverage of lower priced stocks.
Our common stock is quoted on the Nasdaq National Market. Among other
requirements, the listing maintenance standards established by Nasdaq require a
company's common stock to have a minimum bid price of at least $1.00 per share.
On October 16, 2002 Sonic received a letter from Nasdaq indicating that the
minimum bid price of its common stock no longer meets the $1.00 per share
requirement and that it needs to regain compliance by January 14, 2003 in order
to remain on the Nasdaq National Market. On January 15, 2003 Sonic received a
Nasdaq Staff Determination Notice that Sonic's common stock is subject to
delisting from the Nasdaq National Market due to failure to regain compliance
with the $1.00 per share requirement. Sonic requested a hearing before a Nasdaq
Listing Qualifications Panel to review the Staff Determination and made a
presentation on February 27, 2003. At the hearing, Sonic asked for and later
received continued listing while pursuing the sale of the Desktop Software
Business and services transaction. Continued listing was granted through June
23, 2003 provided Sonic maintains a balance of stockholders equity of at least
$10 million at March 31, 2003 and files a proxy by May 1, 2003 requesting
stockholder approval of a reverse split of sufficient size to cause the stock
price to rise above the $1.00 per share minimum. On April 30, 2003 Sonic
requested and obtained an extension of time to file a proxy until May 15, 2003,
and an extension of time to demonstrate a closing bid price of at least $1.00
per share by July 15, 2003. Sonic filed a preliminary proxy statement on May 15,
2003.
If the stockholders approve the reverse stock split proposal, the reverse
stock split will be effected, if at all, only upon a determination by the Board
of Directors that the reverse stock split is in the best interests of Sonic and
our stockholders at that time. In connection with any determination to affect a
reverse stock split, the Board of Directors will set the timing for such a
split. This determination will be made by the Board of Directors to create the
greatest marketability of our common stock based on prevailing market conditions
at that time. No further action on the part of stockholders will be required to
either implement or abandon the reverse stock split. If the Board of Directors
does not implement a reverse stock split prior to June 1, 2004, the authority
granted in this proposal to implement a reverse stock split on these terms will
terminate. The Board of Directors reserves its right to elect not to proceed
with the reverse stock split if it determines, in its sole discretion, that the
split is no longer in the best interests of Sonic and its stockholders.
Certain Risks Associated With the Reverse Stock Split
The total market capitalization of our common stock after the proposed reverse
stock split may be less than the total market capitalization before the proposed
reverse stock split and the per share market price of our common stock following
the reverse stock split may be lower (on an adjusted basis) than the current per
share market price.
28
The market price per new share of our common stock (the "New Shares") after
the reverse stock split may not rise or remain constant in proportion to the
reduction in the number of old shares of our common stock (the "Old Shares")
outstanding before the reverse stock split. For example, based on the market
price of our common stock on June 3, 2003 of $0.65 per share, if the Board of
Directors decided to implement the reverse stock split the post-split market
price of our common stock may be less than $6.50 per share.
Accordingly, the total market capitalization of our common stock after the
proposed reverse stock split may be lower than the total market capitalization
before the proposed reverse stock split and, in the future, the market price of
our common stock following the reverse stock split may not exceed or remain
higher than the market price prior to the proposed reverse stock split. In many
cases, the total market capitalization of a company following a reverse stock
split is lower than the total market capitalization before the reverse stock
split.
The reverse stock split may not result in a per share price that will attract
institutional investors and brokers.
While the Board of Directors believes that a higher stock price may help
generate investor interest, the reverse stock split may not result in a per
share price that will attract institutional investors and brokers.
The reverse stock split may not result in a per share price that will increase
our ability to attract and retain employees and other service providers.
While the Board of Directors believes that a higher stock price may help us
attract and retain employees and other service providers who are less likely to
work for a company with a low stock price, the reverse stock split may not
result in a per share price that will increase our ability to attract and retain
employees and other service providers.
A decline in the market price for our common stock after the reverse stock split
may result in a greater percentage decline than would occur in the absence of a
reverse stock split, and the liquidity of our common stock could be adversely
affected following a reverse stock split.
The market price of our common stock will also be based on our performance
and other factors, some of which are unrelated to the number of shares
outstanding. If the reverse stock split is effected and the market price of our
common stock declines, the percentage decline as an absolute number and as a
percentage of our overall market capitalization may be greater than would occur
in the absence of a reverse stock split. In many cases, both the total market
capitalization of a company and the market price of a share of such company's
common stock following a reverse stock split are lower than they were before the
reverse stock split. Furthermore, the reduced number of shares that would be
outstanding after the reverse stock split could adversely affect the liquidity
of our common stock.
Principal Effects of the Reverse Stock Split
Corporate Matters
. If approved and affected, the reverse stock split would have the
following effects:
. 10 Old Shares owned by a stockholder would be exchanged for one (1)
New Share;
. the number of shares of our common stock issued and outstanding will
be reduced in the ratio of one-for-ten;
29
. proportionate adjustments will be made to the per share exercise price
and the number of shares issuable upon the exercise of all outstanding
options and warrants entitling the holders thereof to purchase shares
of our common stock, which will result in approximately the same
aggregate price being required to be paid for such options or warrants
upon exercise of such options or warrants immediately preceding the
reverse stock split;
. the number of shares reserved for issuance under our existing stock
option plans and employee stock o purchase plans will be reduced
proportionately .
If approved and implemented, the reverse stock split will affect all of our
stockholders uniformly and will not affect any stockholder's percentage
ownership interests in our common stock, except to the extent that the reverse
stock split results in any of our stockholders owning a fractional share. As
described below, stockholders holding fractional shares will be entitled to cash
payments in lieu of such fractional shares. Such cash payments will reduce the
number of post-split stockholders to the extent there are stockholders presently
holding fewer than 10 shares. This, however, is not the purpose for which we are
requesting the reverse stock split. Common stock issued pursuant to the reverse
stock split will remain fully paid and non-assessable. We will continue to be
subject to the periodic reporting requirements of the Securities Exchange Act of
1934, as amended.
Fractional Shares.
No scrip or fractional certificates will be issued in connection with the
reverse stock split. Stockholders who otherwise would be entitled to receive
fractional shares because they hold a number of Old Shares not evenly divisible
by the number selected by the Board of Directors for the reverse stock split
ratio will be entitled, upon surrender of certificate(s) representing such
shares, to a cash payment in lieu thereof. The cash payment will equal the
product obtained by multiplying (a) the fraction to which the stockholder would
otherwise be entitled by (b) the per share closing sales price of our common
stock on the day immediately prior to the effective time of the reverse stock
split, as reported on the Nasdaq National Market. The ownership of a fractional
interest will not give the holder thereof any voting, dividend or other rights
except to receive payment therefore as described herein.
Stockholders should be aware that, under the escheat laws of the various
jurisdictions where stockholders reside, where we are domiciled and where the
funds will be deposited, sums due for fractional interests that are not timely
claimed after the effective time may be required to be paid to the designated
agent for each such jurisdiction. Thereafter, stockholders otherwise entitled to
receive such funds may have to seek to obtain them directly from the state to
which they were paid.
If approved and implemented, the reverse stock split will result in some
stockholders owning "odd lots" of less than 100 shares of our common stock.
Brokerage commissions and other costs of transactions in odd lots are generally
somewhat higher than the costs of transactions in "round lots" of even multiples
of 100 shares.
Authorized Shares.
Upon the effectiveness of the reverse stock split, the number of authorized
shares of common stock that are not issued or outstanding would increase due to
the reduction in the number of shares of our common stock issued and outstanding
based on the reverse stock split ratio selected by the Board of Directors. As of
June 3, 2003, we had 100,000,000 shares of common stock authorized and
27,784,509 shares of common stock issued and outstanding. We will continue to
have 5,000,000 authorized but unissued shares of preferred stock and 10,000,000
authorized but unissued Series B Preferred shares. Authorized but unissued
shares will be available for issuance, and we may issue such shares in
financings or otherwise. If we issue additional shares, the ownership interest
of holders of our common stock may also be diluted. Also, the issued shares may
have rights, preferences or privileges senior to those of our common stock.
30
Accounting Matters.
The reverse stock split will not affect the par value of our common stock.
As a result, as of the effective time of the reverse stock split, the stated
capital on our balance sheet attributable to our common stock will be reduced
proportionately based on the reverse stock split ratio selected by the Board of
Directors, and the additional paid-in capital account will be credited with the
amount by which the stated capital is reduced. The per share net income or loss
and net book value of our common stock will be restated because there will be
fewer shares of our common stock outstanding.
Potential Anti-Takeover Effect
Although the increased proportion of unissued authorized shares to issued
shares could, under certain circumstances, have an anti-takeover effect (for
example, by permitting issuances that would dilute the stock ownership of a
person seeking to effect a change in the composition of our Board of Directors
or contemplating a tender offer or other transaction for the combination of
Sonic with another company), the reverse stock split proposal is not being
proposed in response to any effort of which we are aware to accumulate our
shares of common stock or obtain control of Sonic, nor is it part of a plan by
management to recommend a series of similar amendments to our Board of Directors
and stockholders. Other than the reverse stock split proposal, our Board of
Directors does not currently contemplate recommending the adoption of any other
amendments to our Amended and Restated Articles of Incorporation that could be
construed to affect the ability of third parties to take over or change the
control of Sonic.
Procedure for Effecting Reverse Stock Split and Exchange of Stock Certificates
If the stockholders approve the proposal to authorize the Board of
Directors to implement the reverse stock split and the Board of Directors
decides to implement the reverse stock split on or prior to June 1, 2004, we
will file an Articles of Amendment and Restatement ("Amended Articles") with the
State Department of Assessments and Taxation of Maryland to amend our existing
Articles of Amendment and Restatement. The reverse stock split will become
effective at the time specified in the Amended Articles, which is referred to
below as the "effective time." Beginning at the effective time, each certificate
representing Old Shares will be deemed for all corporate purposes to evidence
ownership of New Shares. The text of the Amended Articles to effect the reverse
stock split, if implemented by the Board of Directors, will be provided upon
request to the Secretary of the Company; provided further, however, that the
text of the form of Amended Articles attached hereto is subject to modification
to include such changes as may be required by the office of the State Department
of Assessments and Taxation of Maryland and as the Board of Directors deems
necessary and advisable to effect the reverse stock split.
As soon as practicable after the effective time, stockholders will be
notified that the reverse stock split has been affected. We expect that our
transfer agent, Continental Stock Transfer and Trust Company, will act as
exchange agent for purposes of implementing the exchange of stock certificates.
Holders of Old Shares will be asked to surrender to the exchange agent
certificates representing Old Shares in exchange for certificates representing
New Shares in accordance with the procedures to be set forth in the letter of
transmittal we send to our stockholders. No new certificates will be issued to a
stockholder until such stockholder has surrendered such stockholder's
outstanding certificate(s), together with the properly completed and executed
letter of transmittal, to the exchange agent. Any Old Shares submitted for
transfer, whether pursuant to a sale, other disposition or otherwise, will
automatically be exchanged for New Shares. STOCKHOLDERS SHOULD NOT DESTROY ANY
STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) UNTIL REQUESTED TO
DO SO.
No Dissenters' Rights
31
Under the MGCL, our stockholders are not entitled to dissenters' rights
with respect to the reverse stock split, and we will not independently provide
stockholders with any such right.
Federal Income Tax Consequences of the Reverse Stock Split
The following summary of certain material federal income tax consequences
of the reverse stock split does not purport to be a complete discussion of all
of the possible federal income tax consequences of the reverse stock split and
is included for general information only. Further, it does not address any
state, local or foreign income or other tax consequences. Also, it does not
address the tax consequences to holders that are subject to special tax rules,
such as banks, insurance companies, regulated investment companies, personal
holding companies, foreign entities, nonresident alien individuals,
broker-dealers and tax-exempt entities. The discussion is based on the
provisions of the United States federal income tax law as of the date hereof,
which is subject to change retroactively as well as prospectively. This summary
also assumes that the Old Shares were, and the New Shares will be, held as a
"capital asset," as defined in the Internal Revenue Code of 1986, as amended
(i.e., generally, property held for investment). The tax treatment of a
stockholder may vary depending upon the particular facts and circumstances of
such stockholder. Each stockholder is urged to consult with such stockholder's
own tax advisor with respect to the tax consequences of the reverse stock split.
Other than the cash payments for fractional shares discussed below, no gain
or loss should be recognized by a stockholder upon such stockholder's exchange
of Old Shares for New Shares pursuant to the reverse stock split. The aggregate
tax basis of the New Shares received in the reverse stock split (including any
fraction of a New Share deemed to have been received) will be the same as the
stockholder's aggregate tax basis in the Old Shares exchanged therefore. In
general, stockholders who receive cash in exchange for their fractional share
interests in the New Shares as a result of the reverse stock split will
recognize gain or loss based on their adjusted basis in the fractional share
interests redeemed. The stockholder's holding period for the New Shares will
include the period during which the stockholder held the Old Shares surrendered
in the reverse stock split.
OUR VIEW REGARDING THE TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT IS NOT
BINDING ON THE INTERNAL REVENUE SERVICE OR THE COURTS. ACCORDINGLY, EACH
STOCKHOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR WITH RESPECT TO ALL
OF THE POTENTIAL TAX CONSEQUENCES TO HIM OR HER OF THE REVERSE STOCK SPLIT.
Recommendation of Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL TO
GRANT DISCRETIONARY AUTHORITY TO OUR BOARD OF DIRECTORS TO AMEND OUR AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT OF OUR
COMMON STOCK IN THE RATIO OF ONE-FOR-TEN AT ANY TIME PRIOR TO JUNE 1, 2004.
PROPOSAL 3: ELECTION OF DIRECTOR
Our Amended and Restated Articles of Incorporation and Bylaws provide that
the Board of Directors shall be divided into five classes, with each class
having a five-year term. Directors are assigned to each class in accordance with
a resolution or resolutions adopted by the Board of Directors, each class
consisting, as nearly as possible, of one-fifth the total number of directors.
Vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes may be filled by either the
affirmative vote of the holders of a majority of the then-outstanding shares or
by the affirmative vote of a majority of the remaining directors then in office,
even if less than a quorum of the Board of the Directors. Newly created
directorships resulting from any increase in the number of directors may, unless
the Board of Directors determines otherwise, be filled only by the affirmative
vote of the directors then in office, even if less than
32
a quorum of the Board of Directors. A director elected by the Board of Directors
to fill a vacancy (including a vacancy created by an increase in the number of
directors) shall serve for the remainder of the full term of the class of
directors in which the vacancy occurred and until such director's successor is
elected and qualified.
Our Amended and Restated Articles of Incorporation provide that the number
of directors, which shall constitute the whole Board of Directors, shall be
fixed exclusively by one or more resolutions adopted from time to time by the
Board of Directors. The authorized number of directors is currently set at six.
Two seats on the Board of Directors, currently held by Monty R. Schmidt and
Curtis J. Palmer, have been designated as Class V Board seats, with the term of
the directors occupying such seat expiring as of the Annual Meeting. Mr. Schmidt
will stand for re-election at this Annual Meeting.
Mr. Schmidt is currently a Board member of Sonic who was previously elected
by the stockholders. If elected at the Annual Meeting, Mr. Schmidt would serve
until the 2008 Annual Meeting and until their successors are elected and
qualified, or until such director's earlier death, resignation or removal.
Immediately following the stockholders meeting, the directors intend to
nominate an additional individual to serve on the board of directors.
Nominees for Director for a Five-Year term expiring on the 2008 Annual Meeting
MONTY R. SCHMIDT
Mr. Schmidt, age 39, has been our President since March 1994 and a Director
since February 1994. Throughout his tenure at Sonic Foundry, Mr. Schmidt has
spearheaded a variety of engineering and strategic initiatives that have helped
grow Sonic from the one-person startup he founded in 1991. In addition to acting
as an industry liaison, Mr. Schmidt is responsible for managing and facilitating
technology development and utilization throughout Sonic's three operating
divisions. Prior to joining Sonic, Mr. Schmidt served in software and hardware
engineering capacities for companies in the medical and food service equipment
industries. Mr. Schmidt has a B.S. degree in Electrical Engineering from the
University of Wisconsin, Madison. Mr. Schmidt is a co-founder of Sonic.
The election of the Class 5 Directors require the approval of a plurality
of the votes cast by holders of the shares of Sonic's common stock. Any shares
not voted, whether by broker non-vote or otherwise, will have no impact on the
outcome of the election.
Recommendation of Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF
MR. SCHMIDT AS A CLASS 5 DIRECTOR.
DIRECTORS CONTINUING IN OFFICE
DAVID C. KLEINMAN Term Expires in 2004
Mr. Kleinman, age 67, has been a Director of Sonic since December 1997 and
has taught at the Graduate School of Business at the University of Chicago since
1971, where he is now Adjunct Professor of Strategic Management. Mr. Kleinman
has been a Director (trustee) of the Acorn Funds since 1972 (of which he is also
chair of the Audit Committee and a member of the Committee on the Investment
Advisory Agreement), a Director since 1984 of the Irex Corporation, a contractor
and distributor of insulation materials (where he is non-executive chair of the
Board of Directors), a Director since 1994 of Wisconsin Paper and Products
Company, a jobber of paper and paper products, with operations in Milwaukee and
Madison, a Director since 1993 of Plymouth Tube Company, a manufacturer of metal
tubing and metal extrusions (where he serves on the Audit Committee), a Director
since 2000 of AT&T Latin America, a facilities-
33
based provider of telecom services in Brazil, Argentina, Chile, Peru and
Columbia (where he is chair of the Audit Committee and a member of the
Compensation Committee) and a member of the Advisory Board of DSC Logistics, a
logistics management and warehousing firm. From 1964 to 1971, Mr. Kleinman was a
member of the finance staff of the Ford Motor Company. Mr. Kleinman received a
B.S. in mathematical statistics and a Ph.D. in business from the University of
Chicago.
ARNOLD B. POLLARD Term Expires in 2005
Mr. Pollard, age 60, has been a Director of Sonic since December 1997 and a
Director of Firebrand Financial Group since August 1996. From 1993 until January
2002, he was the President and Chief Executive Officer of Chief Executive Group,
which publishes "Chief Executive" magazine. For over 25 years, he has been
President of Decision Associates, a management consulting firm specializing in
organizational strategy and structure. Since 1996, Mr. Pollard has served as a
Director and a member of the compensation committee of Delta Financial Corp., a
public company engaged in the business of home mortgage lending and the
International Management Education Foundation, a non-profit educational
organization. He also serves on the advisory board of PeopleTrends. From 1989 to
1991, Mr. Pollard served as Chairman and Chief Executive Officer of Biopool
International, a biodiagnostic public company focusing on blood related testing;
and previously served on the boards of Lillian Vernon Corp. and DEBE Systems
Corp. From 1970 to 1973, Mr. Pollard served as adjunct professor at the Columbia
Graduate School of Business. Mr. Pollard graduated from Cornell University (Tau
Beta Pi), and holds a doctorate in Engineering-Economics Systems from Stanford
University.
FREDERICK H. KOPKO, JR. Term Expires in 2006
Mr. Kopko, age 47, has been our Secretary from April 1997 to February 2001
and has been a Director since December 1995. Mr. Kopko is a partner of the law
firm of McBreen & Kopko, Chicago, Illinois, and has been a partner of that firm
since January 1990. Mr. Kopko practices in the area of corporate law. He has
been a Director of Butler International, Inc. since 1985 and a Director of
Mercury Air Group, Inc. since 1992. Mr. Kopko received a B.A. degree in
economics from the University of Connecticut, a J.D. degree from the University
of Notre Dame Law School, and an M.B.A. degree from the University of Chicago.
RIMAS P. BUINEVICIUS Term Expires in 2007
Mr. Buinevicius, age 40, has been our Chairman of the Board since October
1997 and Chief Executive Officer since January 1997. In addition to his
organizational duties, Mr. Buinevicius is a recognized figure in the rich media
industry focused on the convergence of technology, digital media and
entertainment. Mr. Buinevicius joined Sonic in 1994 as General Manager and
Director of Marketing. Prior to joining Sonic, Mr. Buinevicius spent the
majority of his professional career in the fields of biomedical and industrial
control research and development. Mr. Buinevicius earned an M.B.A. degree from
the University of Chicago; a Master's degree in Electrical Engineering from the
University of Wisconsin, Madison; a Bachelor's degree in Electrical Engineering
from the Illinois Institute of Technology, Chicago; and is a recipient of Ernst
and Young's Entrepreneur of the Year award.
MEETINGS AND COMMITTEES OF DIRECTORS
The Board of Directors met four times during the fiscal year ended
September 30, 2002 ("Fiscal 2002"). The Board of Directors has three standing
committees, the Audit Committee, the Executive Compensation Committee, and the
Stock Option Committee. Sonic does not have a nominating committee of the Board
of Directors.
The Audit Committee consists of Messrs. Kopko, Pollard and Kleinman. The
Audit Committee provides assistance to the Board in fulfilling its oversight
responsibility including: (i) internal and external financial reporting, (ii)
risks and controls related to financial reporting, and (iii) the internal and
external audit process. The Audit Committee is
34
also responsible for recommending to the Board the selection of our independent
public accountants and for reviewing all related party transactions. The Audit
Committee met four times in Fiscal 2002.
The Executive Compensation Committee consists of Messrs. Kopko, Pollard and
Kleinman. The Executive Compensation Committee makes recommendations to the
Board with respect to salaries of employees, the amount and allocation of any
incentive bonuses among the employees, and the amount and terms of stock options
to be granted to executive officers. The Committee is also responsible for
establishing objective, formula-based performance goals, as well as subjective
goals and certifying such goals as having been met. The Executive Compensation
Committee met twice in Fiscal 2002.
The Stock Option Committee, which was formed in January 1999, consists of
Messrs. Pollard and Kleinman. The Stock Option Committee makes recommendations
to the Board with respect to the amount and terms of stock options to be granted
to employees (other than executive officers). The Stock Option Committee met one
time in Fiscal 2002.
Each member of the Board attended at least 75% of the aggregate of the
meetings of the Board and of the Committees on which he served and held during
the period for which he was a Board or Committee member, respectively.
DIRECTORS COMPENSATION
Each Non-Employee Director of Sonic receives (i) a fee of $1,500 for each
Board or Board Committee meeting attended, and (ii) a fee of $850 for each Board
or Board Committee meeting in which such Director participates by telephone. In
the fiscal year ended September 30, 2002, the total amount of such compensation
paid to Non-Employee Directors was $30,750. When traveling from out-of-town, the
members of the Board of Directors are also eligible for reimbursement for their
travel expenses incurred in connection with attendance at Board meetings and
Board Committee meetings. Directors who are also employees do not receive any
compensation for their participation in Board or Board Committee meetings.
Pursuant to the Non-Employee Directors' Stock Option Plan, we grant to each
non-employee director who is reelected or who is continuing as a member of the
Board of Directors at each annual stockholders meeting a stock option to
purchase 20,000 shares of Common Stock. The exercise price of each stock option
is equal to the market price of Common Stock on the date the stock option is
granted. Stock options issued under the Non-Employee Directors' Stock Option
Plan generally will vest fully on the first anniversary of the date of grant and
expire after ten years. An aggregate of 600,000 shares are reserved for issuance
under the Non-Employee Directors' Stock Option Plan.
If any change is made in the stock subject to the Non-Employee Directors
Stock Option Plan, or subject to any option granted thereunder, the Non-Employee
Directors Stock Option Plan and options outstanding thereunder will be
appropriately adjusted as to the type(s), number of securities and price per
share of stock subject to such outstanding options.
The options and warrants set forth above have an exercise price equal to
the fair market value of the underlying common stock on the date of grant. The
term of all such options is ten years.
PROPOSAL 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors, upon the recommendation of the Audit Committee, has
appointed the firm of Ernst & Young LLP ("E&Y") as independent auditors to audit
our financial statements for the year ending September 30, 2003, and has further
directed that management submit the selection of independent accountants for
certification by the stockholders at the annual meeting. E&Y has been our
auditors since September 1997. Representatives of the firm are expected to be
present at the annual meeting to respond to stockholders' questions and to have
the opportunity to make
35
any statements they consider appropriate.
Stockholder ratification of the selection of E&Y as our independent
auditors is not required by our Bylaws or otherwise. However, the Board is
submitting the selection of E&Y to the stockholders for ratification as a matter
of good corporate practice. If the stockholders fail to ratify the selection,
the Board and the Audit Committee will reconsider whether or not to retain that
firm. Even if the selection is ratified, the Board and the Audit Committee in
their discretion may direct the appointment of a different independent
accounting firm at any time during the year if they determine that such a change
would be in the best interests of Sonic and its stockholders.
The ratification of the appointment of E&Y as independent auditors requires
the approval of a majority of the votes cast by holders of our shares. Shares
may be voted for or withheld from this matter. Shares that are withheld and
broker non-votes will have no effect on this matter because ratification of the
appointment of E&Y requires a majority of the shares cast.
Recommendation of Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL 4
RATIFYING THE APPOINTMENT OF E&Y AS INDEPENDENT AUDITORS FOR SONIC.
Relations with Independent Auditors
E&Y has served continuously as our independent auditors since 1997. As
stated in Proposal 4, the Board has selected E&Y to serve as our independent
auditors for the fiscal year ending September 30, 2003.
Audit services performed by E&Y for fiscal 2002 consisted of the
examination of our financial statements, review of quarterly results, and
services related to filings with the Securities and Exchange Commission (SEC).
We also retained E&Y to perform certain other tax and consultative services. All
fees paid to E&Y were reviewed and considered for independence by the Audit
Committee.
Fiscal 2002 Audit Firm Fee Summary
During Fiscal 2002, we retained our principal auditor, E&Y, to provide
services in the following categories and amounts:
Audit Fees $184,680
Audit Related 6,400
Tax Related 24,510
Other Fees 2,500
REPORT OF THE AUDIT COMMITTEE /1/
The Audit Committee of the Board of Directors is responsible for providing
independent objective oversight of Sonic's accounting functions and internal
controls. The Audit Committee is an oversight committee and is not involved in
the operations of Sonic; consequently, it must, by its nature, rely upon
management's representations and on the representations of the independent
auditors. The Audit Committee's oversight does not provide the Audit Committee
with an independent basis to determine that management has maintained
appropriate accounting and financial reporting
----------
/1/ The material in this report is not "soliciting material", is not deemed
filed with the Securities and Exchange Commission, and is not to be incorporated
by reference in any of our filings under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, whether made before or after
the date hereof and irrespective of any general incorporation language in such
filing.
36
principles or policies, or appropriate internal controls and procedures designed
to assure compliance with accounting standards and applicable laws and
regulations.
It is the responsibility of the Audit Committee to provide assistance to
the Board of Directors in fulfilling its oversight responsibility to the
stockholders, potential stockholders, the investment community, and others
relating to Sonic's financial statements and the financial reporting process,
the systems of internal accounting and financial controls, the annual
independent audit of Sonic's financial statements, and the legal compliance and
ethics programs as established by management and the board. Management has the
primary responsibility for the financial statements and the reporting process,
including the systems of internal controls.
In June 2000, the Audit Committee adopted a written charter governing the
operations of the Audit Committee. The charter requires that no member of the
Audit Committee have a relationship that may interfere with the exercise of his
or her independence from management and Sonic, that all Audit Committee members
be financially literate, or shall become financially literate within a
reasonable period of time after appointment to the Audit Committee, and that at
least one member shall have accounting or related financial management
expertise. The Audit Committee has also reviewed standards recently published by
the Securities and Exchange Commission expected to become effective for audit
committees of companies that have fiscal years ending after July 15, 2003. The
board has not made a determination as to whether the current members of the
audit committee satisfy the experience and independence requirements. However,
it is likely the board will recruit an additional independent director to join
the board and replace Mr. Kopko on the audit committee.
We discussed the audited financial statements for the year ended September
30, 2002 with management. We reviewed with E&Y, who is responsible for
expressing an opinion on the conformity of our audited financial statements with
accounting principles generally accepted in the United States, its judgment as
to the quality and acceptability of our accounting principles and any other
matters that we are required to discuss under generally accepted auditing
standards. In addition, we have discussed E&Y's independence from management and
Sonic including matters set forth in the written disclosures required by
Independence Standards Board Standard No. 1 and matters required to be discussed
by Statement on Auditing Standards No. 61 pertaining to communications with the
Audit Committee.
We discussed with E&Y the overall scope and plans of their audit. We met
with E&Y, as Sonic's independent auditors, with and without management present,
to discuss results of their examinations, their evaluations of our internal
controls, and the overall quality of our financial reporting. We held four
meetings during Fiscal 2002.
Relying on the reviews and discussions referred to above, we recommended to
the Board that the audited financial statements be included in the Annual Report
on Form 10-K for the fiscal year ended September 30, 2002 for filing with the
SEC.
Respectfully submitted,
AUDIT COMMITTEE
Frederick H. Kopko, Jr.
Arnold B. Pollard
David C. Kleinman
EXECUTIVE OFFICERS OF SONIC
Our executive officers, who are appointed by the Board of Directors, hold
office for one-year terms or until their respective successors have been duly
elected and have qualified.
Rimas P. Buinevicius is our Chairman of the Board of Directors and Chief
Executive Officer. (See " Directors Continuing in Office ".)
Monty R. Schmidt is our President and a Director. (See "Nominees for
Director".)
37
Curtis J. Palmer, age 33, has been our Chief Technology Officer since
January 1997 and a Director since February 1994. Mr. Palmer is a recognized
technology visionary who oversees the Sonic's engineering and advanced research
efforts. Serving as the primary architect for the Sonic's full product line
offering, Mr. Palmer is instrumental in maintaining an advanced market position
for the Sonic's technology offering. Prior to joining Sonic, Mr. Palmer served
in various engineering capacities for Microsoft in the Multimedia Technologies
group, where he worked on Windows operating system support for multimedia
applications, responsible for assisting third party Windows driver developers in
their development of communications, network and drivers for Windows. Mr. Palmer
studied software engineering at the Oregon Institute of Technology. Mr. Palmer
is a co-founder of Sonic. Mr. Palmer plans to resign his positions as officer
and director of Sonic upon close of the Proposed Transaction.
Kenneth A. Minor, age 41, has been our Chief Financial Officer since June
1997, Assistant Secretary from December 1997 to February 2001 and Secretary
since February 2001. From September 1993 to April 1997, Mr. Minor was employed
as Vice President and Treasurer for Fruehauf Trailer Corporation, a manufacturer
and global distributor of truck trailers and related after market parts and
service where he was responsible for financial, treasury and investor relations
functions. Prior to 1993, Mr. Minor served in various senior accounting and
financial positions for public and private corporations as well as the
international accounting firm of Deloitte Haskins and Sells. Mr. Minor is a
certified public accountant and has a B.B.A. degree in accounting from Western
Michigan University.
Ted J. Lingard, age 38, Ted J. Lingard has been our Senior Vice President -
General Manager Media Services since March 2001, General Manager Media Services
starting in March 2000 through March 2001 and Vice President of Operations from
September 1999 to March 2001. Besides his operating role, Mr. Lingard is in
charge of managing the development of next generation digital media services for
Sonic's entertainment clientele. From 1989 to September 1999, Mr. Lingard was
employed by Advanced Input Devices, a custom electronics manufacturer, in
various manufacturing, engineering, and sales management capacities, including
Sales Engineering Manager, International Business Manager, and Director of
Manufacturing Engineering. Mr. Lingard has a Bachelors Degree in Mechanical
Engineering from the University of Wisconsin, a Masters degree in Mechanical
Engineering from the University of Maryland and a M.B.A. from Gonzaga
University.
Bradley W. Reinke, age 40, Bradley W. Reinke has been our Senior Vice
President - General Manager Software since October 2002, the Senior Vice
President Product Software from March 2001 to October 2002, Vice President of
Sales and Marketing from December 2000 to March 2001 and Vice President of Sales
from October 1999 to December 2000. From August 1998 to October 1999, Mr. Reinke
was employed by Universal Studios - Music and Video Distribution Company as Vice
President of Sales. From September 1993 to July 1998 Mr. Reinke held various
positions including Regional Sales Manager and Director of Sales for Buena Vista
Home Video, a division of the Walt Disney Company. Mr. Reinke has a B.B.A. in
marketing from the University of Wisconsin - Whitewater. Mr. Reinke plans to
resign his position as an officer of Sonic upon close of the Proposed
Transaction.
Krishna V. Pendyala, age 40, was our Senior Vice President of Strategy and
Consulting from October 2001 through November 2002. Previously, Mr. Pendyala
served as Chief Technical Officer and co-founder for MediaSite from 1996 to
October 2001 when Sonic acquired it. He is a multimedia software designer with
over 15 years experience developing informational and learning applications. He
was the Assistant Director of the National Science Foundation sponsored
Informedia project at Carnegie Mellon University's School of Computer Science, a
networked full-content searchable digital video library. From 1990 to 1995, Mr.
Pendyala served as Founder and President of Visual Symphony, Inc., an
award-winning software company that specialized in networked, interactive
multimedia applications designed to enhance human performance. He has been a
consultant to Boeing, Blue Cross Blue Shield, CSX, Sealand, and USX among
others. Mr. Pendyala also serves as an advisor to UNESCO on multimedia
infrastructure and training. Mr. Pendyala has a B.S. degree in Civil Engineering
from the Indian Institute of Technology and an M.S. degree in Educational Media,
TV & Film from Indiana State University. Mr. Pendyala is no longer affiliated
with Sonic.
Howard J. Affinito, age 46, was our Senior Vice President - General Manager
Systems Group from December 2001 through October 2002. From January 2001 to
December 2001 Mr. Affinito was a Vice President with printCafe
38
Systems, a print e-procurement company where he was responsible for sales,
business development and strategy. From June 1999 to December 2000 he was Vice
President and General Manager for MediaSite, acquired by Sonic in October 2001.
From February 1994 to June 1999 Mr. Affinito worked for CBS Corporation in
various senior management capacities including Assistant General Counsel of
CBS/Westinghouse Broadcasting and a Business Affairs Manager/Station Manager for
the CBS Television Stations Division. Mr. Affinito has B.A. and J.D. degrees
from the University of Pittsburgh. Mr. Affinito is no longer affiliated with
Sonic.
Christopher C. Cain, age 34, has been our Vice President-General Counsel
since December 2000 and our Assistant Secretary since February 2001. Mr. Cain
was our Corporate Counsel from July 2000 to November 2000. From September 1998
to July 2000, Mr. Cain was an attorney at the law firm of Foley & Lardner,
Madison, WI. From 1996 to September 1998, Mr. Cain was an attorney at the law
firm of Oppenheimer Wolff & Donnelly, LLP, Minneapolis, MN. Prior to practicing
law, Mr. Cain was a C.P.A. for Arthur Andersen, LLP, Minneapolis, MN. Mr. Cain
has a J.D. degree from the University of Minnesota Law School and a B.B.A. in
accounting from the University of Wisconsin, Madison. Mr. Cain also holds a
C.P.A. license from the State of Minnesota.
Jeffrey S. Hackel, age 36, has been our Vice President - Human Resources
since February 2000 and was the Director of Human Resources from July 1998 to
February 2000. From January 1992 to July 1998, Mr. Hackel was employed in
various human resource management capacities at TDS TELECOM, a national
telecommunications company providing local, long distance and Internet services.
Mr. Hackel has a B.A. degree from the University of Wisconsin - Madison and
holds a S.P.H.R. certification. Mr. Hackel is no longer affiliated with Sonic.
James A. Dias, age 37, has been our Vice President of Sales and Marketing
for the Systems Group since December 2002 and Vice President of Strategic
Solutions and Alliances from October 2001 to December 2002. Previously he served
as Director of Strategic Solutions at MediaSite from June 2000 until Sonic
acquired it. From 1995 to 2000 Mr. Dias served as Principal at Dias &
Associates, an IT planning and design consultancy that managed projects and
operations for clients across the United States. He has also led the development
of products and applications involving interactive media, the Internet, and
wireless handheld devices. Mr. Dias began his career as a
director/producer/composer working on independent projects for Marriot Corp,
PBS, and the State of Michigan. From 1989 to 1994, he was a Faculty Member and
Director of Instructional Media at Hanover College. Mr. Dias has an M.A. in
Electronic Media and Human Factors Design from Ohio State University, a BA in
Filmmaking and Communication from Northern Michigan University, and has
completed the Executive Program for Marketing High Technology at Carnegie Mellon
University.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information known to us about the beneficial
ownership of our Common Stock as of June 3, 2003, by each stockholder known by
us to own beneficially more than 5% of our Common Stock, each of our executive
officers named in the Summary Compensation Table ("Named Executive Officers"),
each of our directors, and all of our directors and executive officers as a
group. Unless otherwise noted, the mailing address for these stockholders is
1617 Sherman Avenue, Madison, Wisconsin 53704.
Beneficial ownership is determined in accordance with the rules of the SEC,
and includes voting or investment power with respect to shares. Shares of common
stock issuable upon the exercise of stock options or warrants exercisable within
60 days after June 3, 2003, which we refer to as Presently Exercisable Options,
are deemed outstanding for computing the percentage ownership of the person
holding the options but are not deemed outstanding for computing the percentage
ownership of any other person. Unless otherwise indicated below, to our
knowledge, all persons named in the table have sole voting and investment power
with respect to their shares of common stock, except to the extent authority is
shared by spouses under applicable law. The inclusion of any shares in this
table does not constitute an admission of beneficial ownership for the person
named below.
Based on currently available Schedules 13D and 13G filed with the SEC, we
do not know of any beneficial owners of more than 5% of our Common Stock, other
than listed below.
39
Number of Shares of
Class Percent
Name of Beneficial Owner(1) Beneficially Owned of Class (2)
--------------------------- ------------------- ------------
Common Stock
Monty R. Schmidt (3) 3,287,987 11.8%
Curtis J. Palmer(4) 3,277,097 11.7
Rimas P. Buinevicius(5) 2,354,514 8.1
Omicron Partners, L.P. (6) 1,469,388 5.0
Zero Stage Capital Associates VI Limited Partnership
101 Main Street, 17th Floor
Cambridge, MA 02142-1519 1,470,508 5.3
CCM Master Fund(7) 2,863,906 10.3
One North Wacker Drive - Suite 4725
Chicago, IL 60606
Bradley W. Reinke (8) 464,234 1.6
Ted J. Lingard (9) 451,856 1.6
Frederick H. Kopko, Jr.(10)
20 North Wacker Drive
Chicago, IL 60606 403,192 1.4
Krishna V. Pendyala (11) 302,671 1.1
Arnold B. Pollard(12) 192,745 *
733 Third Avenue
New York, NY 10017
David C. Kleinman(13) 140,000 *
1101 East 58th Street
Chicago, IL 60637
Howard J. Affinito (14) 116,666 *
All Executive Officers and Directors as a Group (13
persons)(15) 11,433,342 36.3%
* less than 1%
(1) Sonic believes that the persons named in the table above, based upon
information furnished by such persons, have sole voting and investment
power with respect to the number of shares indicated as beneficially owned
by them.
(2) Applicable percentages are based on 27,784,509 shares outstanding, adjusted
as required by rules promulgated by the Securities and Exchange Commission.
(3) Includes 144,851 shares subject to Presently Exercisable Options.
(4) Includes 133,961 shares subject to Presently Exercisable Options.
(5) Includes 1,150,000 shares subject to Presently Exercisable Options.
(6) Consists of 816,327 shares of Common Stock which Omicron Master Trust
("Omicron Trust") has the right to acquire upon conversion of our 10%
Convertible Note due 2004 and 653,061 shares of our Common Stock which
Omicron Trust has the right to acquire upon exercise of a warrant. Based on
publicly available information reported on March 21, 2003, (i) Omicron
Capital, L.P. ("Omicron Capital") serves as investment manager to Omicron
Trust, and by reason of such relationship, may be deemed to share
dispositive power over the shares of Common Stock listed as beneficially
owned by Omicron Trust; (ii) Omicron Capital, Inc. ("OCI") serves as
general partner of Omicron Capital, and by reason of such relationship, may
be deemed to share dispositive power over the shares of Common Stock listed
as beneficially owned by Omicron Capital; (iii) Oliver Morali ("Morali")
serves as president and is a director and stockholder of OCI, and by reason
of such relationships, may be deemed to share dispositive power over the
shares of Common Stock listed as beneficially owned by OCI; (iv) Bruce
Bernstein ("Bernstein") serves as an officer of OCI and has agreed to
purchase shares of OCI. By reason of such relationships, Bernstein may be
deemed to share dispositive power over the shares of Common Stock listed as
40
beneficially owned by OCI; (v) Winchester Global Trust Company ("WGTCL")
serves as trustee of Omicron Trust, and by reason of such relationship, may
be deemed to share voting and dispositive power over the shares of Common
Stock listed as beneficially owned by Omicron Trust; and (vi) WGTCL may be
deemed to be controlled by Oliver Lewnowski ("Lewnowski"), and by reason of
such control, may be deemed to share voting and dispositive power over the
shares of Common Stock listed as beneficially owned by WGTCL. The address
of Omicron Trust is c/o Olympia Capital International, Inc., Williams
House, 20 Reid Street, Hamilton HM11, Bermuda. The addresses of Omicron
Capital, OCI, Morali and Bernstein are 153 E. 53rd Street, 48th Floor, New
York, New York 10022. The addresses of WGTCL, and Lewnowski are c/o
Winchester Fiduciary Limited, Williams House, 20 Reid Street, Hamilton HM11
Bermuda.
(7) Represents shares beneficially owned by CCM Master Fund, Ltd.; Coghill
Capital Management, L.L.C. and Clint D. Coghill. Mr. Coghill is the
managing member of Coghill Capital Management, L.L.C.; an entity which
serves as the investment manager of CCM Master Fund, Ltd.
(8) Includes 463,000 shares subject to Presently Exercisable Options.
(9) Includes 447,000 shares subject to Presently Exercisable Options.
(10) Includes an aggregate of 80,000 warrants exercisable within sixty (60) days
of the date hereof and 140,000 Presently Exercisable Options.
(11) Includes an aggregate of 100,000 warrants and 202,671 Presently Exercisable
Options.
(12) Includes 192,745 shares subject to Presently Exercisable Options.
(13) Includes 140,000 shares subject to Presently Exercisable Options.
(14) Includes 116,666 shares subject to Presently Exercisable Options.
(15) Includes an aggregate of 3,523,183 shares subject to Presently Exercisable
Options and 180,000 warrants exercisable within sixty (60) days of the date
hereof.
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation we paid during the
fiscal year ended September 30, 2002 to our Chief Executive Officer and our four
other most highly compensated executive officers ("Named Executive Officers").
Long Term Compensation
------------------------------------
Awards of
Other Securities
Annual Compensation Annual Underlying All Other
------------------------- Compen- Option Compen-
Name and Principal Position Year Salary Bonus sation(1) /SARs sation
---------------------------- ---- -------- ------- --------- ----------- ----------
Rimas P. Buinevicius 2002 $ 31,854 -- $3,941 1,000,000 --
Chief Executive Officer and 2001 201,654 -- 9,731 110,000 --
Chairman 2000 221,154 $70,000 7,033 -- --
Krishna V. Pendyala 2002 164,510 -- -- 303,564 $140,031(2)
Senior Vice President of 2001 -- -- -- -- --
Strategy and Consulting 2000 -- -- -- -- --
Curtis J. Palmer 2002 141,539 -- 5,958 7,921 15,935(3)
Chief Technology Officer 2001 169,231 -- 7,248 90,000 --
2000 184,615 70,000 4,466 -- --
Howard J. Affinito 2002 108,654 -- 393 250,000 --
Senior Vice President - 2001 -- -- -- -- --
General Manager 2000 -- -- -- -- --
Media Systems
41
(1) Consists of personal use of company vehicle included as portion of
executive's taxable compensation.
(2) Consists of $130,500 contractual amount owed Mr. Pendyala by MediaSite and
assumed by Sonic and $9,531 representing compensation earned and deferred
pursuant to Sonic's deferred compensation plan plus interest accrued of
$300.
(3) Consists of compensation earned and deferred pursuant to Sonic's deferred
compensation plan of $15,385 and $38,462 for Mssrs. Palmer and Schmidt,
plus interest accrued of $550 and $1,375, respectively.
Employment Agreements
We entered into employment agreements with Rimas Buinevicius, Monty R.
Schmidt, and Curtis Palmer and renewed them on substantially the same terms as
the prior agreements in January 2001. The salaries of each of Messrs.
Buinevicius, Schmidt and Palmer are subject to increase each year at the
discretion of the Board of Directors. Messrs. Buinevicius, Schmidt, and Palmer
are also entitled to incidental benefits of employment under the agreements.
Each of the employment agreements provides that if (i) Sonic Foundry breaches
its duty under such employment agreement, (ii) the employee's status or
responsibilities with Sonic Foundry has been reduced, (iii) Sonic Foundry fails
to perform its obligations under such employment agreement, or (iv) after a
Change in Control of Sonic Foundry, our financial prospects have significantly
declined, the employee may terminate his employment and receive all salary and
bonus owed to him at that time, prorated, plus three times the highest annual
salary and bonus paid to him in any of the three years immediately preceding the
termination. If the employee becomes disabled, he may terminate his employment
and receive all salary owed to him at that time, prorated, plus a lump sum equal
to the highest annual salary and bonus paid to him in any of the three years
immediately preceding the termination. Pursuant to the employment agreements,
each of Messrs. Buinevicius, Schmidt and Palmer has agreed not to disclose our
confidential information and not to compete against us during the term of his
employment agreement and for a period of two years thereafter. Such non-compete
clauses may not be enforceable, or may only be partially enforceable, in state
courts of relevant jurisdictions.
A "Change in Control" is defined in the employment agreements to mean: (i)
a change in control of a nature that would have to be reported in our proxy
statement; (ii) Sonic Foundry is merged or consolidated or reorganized into or
with another corporation or other legal person and as a result of such merger,
consolidation or reorganization less than 75% of the outstanding voting
securities or other capital interests of the surviving, resulting or acquiring
corporation or other legal person are owned in the aggregate by our stockholders
immediately prior to such merger, consolidation or reorganization; (iii) Sonic
Foundry sells all or substantially all of its business and/or assets to any
other corporation or other legal person, less than 75% of the outstanding voting
securities or other capital interests of which are owned in the aggregate by our
stockholders, directly or indirectly, immediately prior to or after such sale;
(iv) any person (as the term "person" is used in Section 13(d) (3) or Section
14(d) (2) of the Securities Exchange Act of 1934 (the "Exchange Act") had become
the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3
or any successor rule or regulation promulgated under the Exchange Act) of 25%
or more of the issued and outstanding shares of our voting securities; or (v)
during any period of two consecutive years, individuals who at the beginning of
any such period constitute our directors cease for any reason to constitute at
least a majority thereof unless the election, or the nomination or election by
our stockholders, of each new director was approved by a vote of at least two-
thirds of such directors then still in office who were directors at the
beginning of any such period.
OPTIONS GRANTED IN FISCAL 2002
Sonic grants options to its executive officers under our employee stock
option plans. As of September 30, 2002, options to purchase a total of 5,837,000
shares were outstanding under the plans, and options to purchase 485,000 shares
remained available for grant thereunder. During Fiscal 2002, options to purchase
1,582,000 shares were granted to Named Executive Officers.
The following tables show for the fiscal year ended September 30, 2002
certain information regarding options granted to, exercised by and held at
year-end by the Named Executive Officers.
42
Potential Realizable
Value at Assumed
Annual Rates Price
Appreciation for
Individual Grants Option Term
-------------------------------------- -----------------------
% of Total
Number of Options/
securities SARs
Underlying Granted Exercise
Options/ to Employees or Base
SARs in Price Expiration
Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
----------- ------------ ---------- ---------- ---------- ----------
Rimas P. Buinevicius 1,000,000 28.7% $1.12 10/11 $704,000 $1,785,000
Krishna V. Pendyala 300,000 8.6 1.01 10/11 191,000 483,000
3,564 .1 1.01 10/11 2,000 6,000
Curtis J. Palmer 7,921 .2 1.01 10/11 5,000 13,000
Monty R. Schmidt 19,802 .6 1.01 10/11 13,000 32,000
Howard J. Affinito 200,000 5.7 1.12 10/11 141,000 357,000
50,000 1.4 1.12 10/11 40,000 104,000
2002 FISCAL YEAR-END OPTION VALUES
Number of Unexercised Value of Unexercised In-the-Money
Options/SARs at Fiscal Options/SARs at Fiscal
Year-End(#) Year-End($)
--------------------------- ---------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Rimas P. Buinevicius 1,033,332 116,668 $0 $0
Krishna V. Pendyala 100,890 202,674 0 0
Curtis J. Palmer 105,313 32,608 0 0
Monty R. Schmidt 108,283 41,519 0 0
Howard J. Affinito 45,833 204,167 0 0
No stock was acquired upon exercise of options in the last fiscal year.
Long-Term Incentive Plans -- Awards in Last Fiscal Year
Estimated Future Payouts
Under Non-Stock Price-Based Plans
------------------------------------------
Performance
Number of or Other
Shares, Units Period Until
or Other Rights Maturation Threshold Target Maximum
(%) (A) or Payout (B) ($ or %) (C) ($ or %) (D) ($ or %) (E)
--------------- ------------- ------------ ------------ ------------
Rimas P. Buinevicius -- -- -- -- --
Krishna V. Pendyala 3,564 10/05 $ 8,311 $16,081 $16,081
Curtis J. Palmer 7,921 10/06 13,845 30,694 30,694
Monty R. Schmidt 19,802 10/06 34,615 76,734 76,734
Howard J. Affinito -- -- -- -- --
43
(A) Number of common stock options awarded
(B) Note maturity selected
(C) Salary deferred as of September 30, 2002 less 10% withdrawal penalty.
(D)(E) Balance of note and interest at maturity
Sonic established a Deferred Compensation Plan effective December 7, 2001.
The plan allowed any salaried employee of Sonic or any of its subsidiaries to
elect a one-year salary deferral of $2,000 or more. At the end of the deferral
period the employee's salary returned to the pre-deferral level, subject to
employment status at that time and any performance reviews, salary adjustments
and evaluations.
Employees received a promissory note equal to their deferral and selected a
24, 36 or 48-month maturity for repayment. Interest rates varied based on
maturity selected at 9%, 10% or 11% for the 24, 36 or 48 month terms and are
accrued semi-annually. Employees may request an early withdrawal from the plan,
subject to a 10% penalty and the loss of interest from the last accrual date.
Each employee that participates in the Deferred Compensation Plan is
entitled to receive a non-qualified option grant equal to 20%, 30% or 40% of the
principal value of the note, depending on the maturity selected. Options were
granted with an exercise price equal to the market value of the stock although
employees are eligible to receive a bonus equal to the cost incurred upon
exercise of the options in certain circumstances. One fourth of the options
become exercisable every six months.
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE /1/
The Executive Compensation Committee (the "Committee") of the Board of
Directors is composed entirely of outside, non-management directors. The
Committee sets and administers the policies governing annual compensation of
executive officers, including cash compensation and stock option programs for
executive employees.
Compensation Policies
Sonic Foundry operates in the competitive and rapidly changing high
technology and media business environment. The goals of our executive
compensation program are to motivate executives to achieve our business
objectives in this environment and reward them for their achievement, foster
teamwork, and attract and retain executive officers who contribute to our
long-term success. During fiscal 2002, we used primarily salary, stock options
and personal use of company vehicles to meet these goals. Sonic's executive
compensation programs are intended to attract and retain qualified executives
and to motivate them to achieve goals that will lead to appreciation of
stockholder value.
Our philosophy and guiding principles are to provide compensation levels
that are comparable to those offered by other leading high technology companies.
Our compensation policies align the interests of our officers with the long-term
interests of our stockholders through stock compensation. For example, in fiscal
2002, compensation included options to purchase shares granted under our 1999
Non-Qualified Stock Option Plan. Another principle is that a substantial portion
of each executive's compensation be in the form of an incentive bonus. Receipt
of this bonus, which has in the past been payable annually in January, is
contingent upon meeting both individual performance goals and company
objectives. However, we retain the authority to alter the bonus amounts because
qualitative factors and long-term results need to be evaluated as well as the
short-term operating results. Based on weak economic and industry factors, no
executives received a bonus in fiscal 2002 although we may grant cash bonuses in
fiscal 2003 or grant bonuses that offset loans owed Sonic by certain officers.
----------
/1/ The material in this report is not "soliciting material," is not
deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference in any filing of Sonic under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
44
Annual Compensation
The salary portion of executive compensation is determined annually by
reference to multiple surveys of high technology companies. The executive
officers are matched to each position by comparing their responsibilities to the
survey description most accurately representing their position with us by
content, organizational level and level of revenue. Given the officers' levels
of responsibility and our past performance, we target a competitive salary for
each executive officer. A substantial portion of the annual compensation of each
executive officer would normally have been in the form of an incentive bonus,
which becomes a greater portion of an officer's potential total compensation as
the executive's level of responsibility increases. In an effort to conserve cash
and invest in the long-term success of Sonic, all executive officers, including
our Chief Executive Officer, agreed to reduce their base compensation as of
January 2001 by between 10 and 20%. The officer group offered further base
compensation reductions effective December 1, 2001 of a total of $466,000 or an
average of 40% of the already reduced salary level. Mr. Buinevicius asked the
compensation committee to reduce his base compensation from $250,000 to $200,000
as of January 1, 2001 and to $1,229 as of December 1, 2001. The compensation
committee awarded larger option grants than what had historically been granted
to certain of the officers in lieu of cash compensation (see Long-term
Compensation below). In addition, to these salary reductions, several of the
officers further reduced their salaries pursuant to Sonic's Salary Deferral
Plan. Amounts deferred under the Plan are payable by Sonic in 2005 and 2006.
Long-term Compensation.
The Committee has utilized stock options for all employees to motivate and
retain them for the long-term. The Committee believes that these forms of
compensation closely align the employee's interests with those of stockholders
and provide a major incentive to them in building stockholder value.
Options are typically granted annually and are subject to vesting
provisions to encourage employees to remain employed with Sonic Foundry. The
Committee considered annual grants in December 2001 and granted options to
executives on October 5, 2001. Grants to certain executives in October 2001,
including Mr. Buinevicius, reflected the long-term commitment to Sonic they made
by waiving significant portions of their salary. Such grants totaled options to
purchase 1.4 million shares, of which Mr. Buinevicius received 750,000. Mr.
Buinevicius also received 250,000 performance-based stock options. Total stock,
which may be acquired upon options granted to executives in October 2001,
including options granted to Mr. Pendyala and Mr. Affinito upon joining Sonic,
totaled 2.3 million shares.
Each executive officer receives stock options based upon that officer's
relative position, responsibilities and performance by the individual over the
previous fiscal year and the officer's anticipated performance, responsibilities
and cash compensation. Additionally, we consider the net present value of the
grant compared to typical grants at high technology companies of a similar size
to Sonic Foundry. We also review the prior level of grants to the officers and
to other members of senior management, including the number of shares that
continue to be subject to vesting under outstanding options, in setting the
level of options to be granted to the executive officers.
Stock options are granted at an option price equal to the fair market value
of Sonic's Common Stock on the date of the grant and are subject to vesting over
varying periods. The option-vesting period is designed to encourage employees to
work with a long-term view of Sonic's welfare and to establish their long-term
affiliation with Sonic. It is also designed to reduce employee turnover and to
retain the knowledge and skills of valued staff.
Chief Executive Officer Compensation
Despite a continued weak environment for Sonic's products and services in
fiscal 2002, revenues were flat compared to fiscal 2001 and 2000, yet losses
before a change in accounting principal, amortization of intangibles and
restructuring charges were significantly reduced to $12 million in 2002 compared
to $17 million and $21 million in fiscal 2001 and 2000, respectively. In an
effort to conserve cash, Mr. Buinevicius asked the compensation committee to
reduce his base compensation from $250,000 to $200,000 as of January 1, 2001 and
further to $1,229 in December 2001. No cash bonus was awarded to Mr. Buinevicius
in fiscal 2002. Mr. Buinevicius was granted 750,000 Common
45
Stock options issued under the 1999 non-qualified stock option plan as
consideration for reducing his salary and 250,000 performance-based stock
options.
EXECUTIVE COMPENSATION COMMITTEE
Frederick H. Kopko, Jr.
Arnold B. Pollard
David C. Kleinman
Compensation Committee Interlocks and Insider Participation
The members of the Executive Compensation Committee of Sonic's Board of
Directors for Fiscal 2002 were those named in the Executive Compensation
Committee Report. No member of the Committee was at any time during Fiscal 2002
or at any other time an officer or employee of Sonic Foundry, Inc.
No executive officer of Sonic Foundry, Inc. has served on the board of
directors or compensation committee of any other entity that has or has had one
or more executive officers serving as a member of the Board of Directors of
Sonic Foundry, Inc. During Fiscal 2002, we retained the Chicago law firm of
McBreen & Kopko to perform certain legal services. Frederick H. Kopko, Jr. is a
partner in McBreen & Kopko.
SONIC STOCK PRICE PERFORMANCE
The stock price performance graph below shall not be deemed to be
incorporated by reference by any general statement incorporating by reference
this annual report on form 10-K into any filing under the Securities Act of
1933, or under the Securities Exchange Act of 1934, except to the extent that we
specifically incorporate this information by reference, and shall not otherwise
be deemed soliciting material or filed under such acts, irrespective of our
general incorporation language in such filing.
The graph below compares the cumulative total stockholder return on our
Common Stock from April 22, 1998 through and including September 30, 2002 with
the cumulative total return on The NASDAQ Stock Market (US only) and the RDG
Technology Composite. We've also included the JP Morgan H&Q Technology Index
through fiscal 2001. The JP Morgan H&Q Technology Index was not produced for the
entire fiscal 2002 comparison period, so we did not included it for fiscal 2002.
The graph assumes that $100 was invested in our Common Stock on April 22, 1998
or on March 31, 1998 for each of the indexes and that all dividends were
reinvested. Unless otherwise specified, all dates refer to the last day of each
month presented. Our Common Stock is traded on the NASDAQ National Market and
closed at $.74 per share on September 30, 2002.
The comparisons in the graph below are based on historical data, with our
Common Stock prices based on the closing price on the dates indicated, and are
not intended to forecast the possible future performance of our Common Stock.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
JP Morgan H&Q NASDAQ RDG Technology
Sonic Foundry Technology Stock Market (U.S.) Composite
------------- ------------- ------------------- --------------
4/22/98 100.00 100.00 100.00 100.00
9/30/98 79.17 91.01 92.71 103.00
9/30/99 125.83 175.29 151.24 197.33
9/30/00 236.67 285.41 200.85 263.56
9/30/01 32.80 94.70 82.08 103.04
46
9/30/02 19.73 -- 64.65 64.33
47
COMPARISON OF 53 MONTH CUMULATIVE TOTAL RETURN*
AMONG SONIC FOUNDRY, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX,
THE JP MORGAN H & Q TECHNOLOGY INDEX
AND THE RDG TECHNOLOGY COMPOSITE INDEX
[GRAPH]
* $100 invested on 4/22/98 in stock or on 3/31/98 in index-
including reinvestment of dividends.
Fiscal year ending September 30.
CERTAIN TRANSACTIONS
Frederick H. Kopko, Jr., a director and stockholder of Sonic Foundry, is a
partner in McBreen & Kopko. Pursuant to the Directors' Stock Option Plan, Mr.
Kopko has been granted options to purchase 100,000 shares of Common Stock at
exercise prices ranging from $1.75 to $59.88. He also has options to purchase
40,000 shares of Common Stock at an exercise price of $1.09 pursuant to the 1999
Non - Qualified Stock Option Plan in his capacity as a director. We granted Mr.
Kopko a warrant in August 1999 to purchase 30,000 shares of common stock at an
exercise price of $4.00 per share, in exchange for a stand-by loan commitment of
$2,000,000. In February, 2000 Mr. Kopko was also granted 50,000 warrants at an
exercise price of $28.12 for services in his capacity as a director. During
fiscal 2002, we paid the Chicago law firm of McBreen & Kopko certain
compensation for legal services rendered subject to standard billing rates.
For the years ended September 30, 2002 and 2001, Sonic had loans
outstanding to certain officers for $58,000 and $25,000 related to issuance of
common stock.
In November 2002 Sonic completed a bridge financing transaction of
$1,000,000 with the brother of Rimas Buinevicius, Chief Executive Officer. Mr.
Buinevicius abstained from board of director discussion regarding approval of
the transaction. The note is backed by substantially all the assets of Sonic and
is due, along with $250,000 of interest, at the earlier of March 2003 or upon
completion of a transaction generating sufficient cash to allow for payment.
Despite maturity of the note in March 2003, no payments have been made to the
note holder as of the date hereof.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Sonic's
officers and directors, and persons who own more than ten percent of the Common
Stock, to file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Based on this review of the copies of such forms
received by it, Sonic believes that all filing requirements applicable to its
officers, directors, and greater than ten-percent beneficial owners were
48
complied with.
STOCKHOLDER PROPOSALS
In order for a stockholder proposal to be considered for inclusion in our
proxy statement and form of proxy relating to the Annual Meeting of Stockholders
for the year 2004, the proposal must be received by us no later than December
15, 2003. Additionally, Sonic will be authorized to exercise discretionary
voting authority with respect to any stockholder proposal not disclosed in
Sonic's 2004 proxy statement if Sonic has not received written notice of such
proposal by February 5, 2004.
OTHER MATTERS
The Board of Directors has at this time no knowledge of any matters to be
brought before this year's Annual Meeting other than those referred to above.
However, if any other matters properly come before this year's Annual Meeting,
it is the intention of the persons named in the proxy to vote such proxy in
accordance with their judgment on such matters.
GENERAL
A copy of our Annual Report to Stockholders for the fiscal year ended
September 30, 2002 is being mailed, together with this Proxy Statement, to each
stockholder. Additional copies of such Annual Report and of the Notice of Annual
Meeting, this Proxy Statement and the accompanying proxy may be obtained from
us. We have retained Continental Stock Transfer and Trust Company to assist in
the solicitation of proxies, primarily from brokers, banks and other nominees,
for an estimated fee of $3,000 plus expenses and expect to retain MacKensie
Partners, Inc., (800)322-2885, to assist us in the solicitation of proxies
from individual stockholders for an estimated fee of $15,000 in fees plus costs
and expenses, the payment of which fee will be split with SPA. We will, upon
request, reimburse brokers, banks and other nominees, for costs incurred by them
in forwarding proxy material and the Annual Report to beneficial owners of
Common Stock. In addition, directors, officers and regular employees of Sonic
and its subsidiaries, at no additional compensation, may solicit proxies by
telephone, telegram or in person. All expenses in connection with soliciting
management proxies for this year's Annual Meeting, including the cost of
preparing, assembling and mailing the Notice of Annual Meeting, this Proxy
Statement and the accompanying proxy, are to be paid by Sonic.
Sonic will provide without charge (except for exhibits) to any record or
beneficial owner of its securities, on written request, a copy of Sonic's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
fiscal year ended September 30, 2002, including the financial statements and
schedules thereto. Exhibits to said report will be provided upon payment of fees
limited to Sonic's reasonable expenses in furnishing such exhibits. Written
requests should be directed to Investor Relations, 1617 Sherman Avenue, Madison,
Wisconsin 53704.
In order to assure the presence of the necessary quorum at this year's
Annual Meeting, and to save Sonic the expense of further mailings, please date,
sign and mail the enclosed proxy promptly in the envelope provided. No postage
is required if mailed within the United States. The signing of a proxy will not
prevent a stockholder of record from voting in person at the meeting.
By Order of the Board of Directors,
Kenneth A. Minor
June __, 2003 Secretary
49
Appendix A
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
by and between
SP SOFTWARE ACQUISITION COMPANY
"Buyer"
and
SONIC FOUNDRY, INC.
"Seller"
Dated: June , 2003
--
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS.........................................................1
1.1 Defined Terms.......................................................1
1.2 Other Defined Terms; Other Definitional Provisions.................15
ARTICLE II PURCHASE AND SALE OF ASSETS.......................................17
2.1 Transfer of Purchased Assets.......................................17
2.2 Assumption of Liabilities..........................................18
2.3 Excluded Liabilities...............................................18
2.4 Consideration......................................................20
2.5 Allocation of Consideration........................................21
2.6 Prorations.........................................................22
2.7 Closing Costs; Transfer Taxes and Fees.............................22
2.8 Net Working Capital Adjustment.....................................22
ARTICLE III CLOSING..........................................................24
3.1 Closing............................................................24
3.2 Conveyances at Closing.............................................25
3.3 SDAT Filing........................................................26
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER..........................27
4.1 Organization and Good Standing.....................................27
4.2 Authorization; Enforceability......................................27
4.3 Capitalization; Subsidiaries.......................................27
4.4 Books and Records..................................................28
4.5 Conflicts; Third Party Consents....................................28
4.6 Financial Statements...............................................29
4.7 Purchased Assets...................................................30
4.8 Liabilities........................................................30
4.9 Absence of Certain Changes or Events...............................30
4.10 Taxes..............................................................33
4.11 Facilities.........................................................35
4.12 Intellectual Property; Software....................................36
4.13 Contracts; No Defaults.............................................40
4.14 Employee Benefits..................................................43
4.15 Labor Matters; Employees...........................................44
4.16 Legal Proceedings..................................................45
4.17 Compliance with Law................................................45
4.18 Permits............................................................46
4.19 Environmental Matters..............................................47
4.20 Insurance..........................................................48
4.21 Inventory; Receivables; Payables...................................48
4.22 Purchase Commitments and Outstanding Bids..........................49
i
4.23 Related Party Transactions.........................................49
4.24 Suppliers and Customers............................................49
4.25 No Brokers.........................................................50
4.26 Product Warranty and Liabilities...................................50
4.27 No Other Agreements................................................50
4.28 Material Misstatements Or Omissions................................50
4.29 Solvency...........................................................50
4.30 Fairness Opinion...................................................51
4.31 Nova Litigation Settlement.........................................51
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER............................51
5.1 Organization of Buyer..............................................51
5.2 Authorization......................................................51
5.3 Conflicts; Third Party Consents....................................52
5.4 Legal Proceedings..................................................52
5.5 No Brokers.........................................................52
ARTICLE VI COVENANTS OF SELLER AND BUYER.....................................53
6.1 Further Assurances.................................................53
6.2 Conduct of Business................................................53
6.3 Stockholders Meeting; Proxy Statement..............................53
6.4 Consents...........................................................54
6.5 Notification of Certain Matters....................................55
6.6 Employee Matters...................................................55
6.7 Collection of Accounts Receivable and Letters of Credit............57
6.8 Books and Records..................................................57
6.9 Tax Matters........................................................57
6.10 Bulk Sales.........................................................58
6.11 No-Shop Clause.....................................................58
6.12 Nova Litigation Settlement Covenants...............................60
ARTICLE VII CONDITIONS PRECEDENT TO CLOSING..................................61
7.1 Conditions to Seller's Obligations to Close........................61
7.2 Conditions to Buyer's Obligations to Close.........................61
ARTICLE VIII INDEMNIFICATION.................................................63
8.1 Survival of Representations, Etc...................................63
8.2 Indemnification....................................................64
8.3 Limitations on Indemnification for Certain Breaches................66
8.4 Indemnification Procedures.........................................66
8.5 Product and Warranty Liability.....................................67
8.6 Holdback...........................................................67
ARTICLE IX MISCELLANEOUS.....................................................68
9.1 Publicity..........................................................68
ii
9.2 Confidential Information...........................................68
9.3 Termination Events.................................................68
9.4 Expenses...........................................................72
9.5 Specific Performance...............................................72
9.6 Legal Proceedings; Arbitration.....................................72
9.7 Waiver of Jury Trial...............................................73
9.8 Entire Agreement; Amendments and Waivers...........................73
9.9 Governing Law......................................................74
9.10 Headings...........................................................74
9.11 Notices............................................................74
9.12 Severability.......................................................75
9.13 Binding Effect; Third Party Beneficiaries; Assignment..............75
9.14 Attorneys' Fees and Costs..........................................76
9.15 Liquidated Damages.................................................76
9.16 Counterparts.......................................................77
9.17 Representation by Counsel..........................................77
9.18 Schedules..........................................................78
9.19 No Interpretation Against Drafter..................................78
iii
AMENDED AND RESTATED ASSET PURCHASE AGREEMENT
This AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (this "Agreement"),
dated as of June , 2003 (the "Amendment Date") but effective as of May 2, 2003
--
(the "Agreement Date"), is by and between SP SOFTWARE ACQUISITION COMPANY, a
Delaware corporation ("Buyer"), and SONIC FOUNDRY, INC., a Maryland corporation
("Seller").
RECITALS
A. Seller owns certain assets that it uses in the conduct of the
Business (as defined below).
B. Buyer desires to purchase from Seller, and Seller desires to sell
to Buyer, such assets and to assume certain liabilities of Seller associated
therewith, subject to the terms and conditions set forth in this Agreement.
C.Seller and Buyer entered into that certain Asset Purchase Agreement,
dated as of May 2, 2003 (the "Original Agreement"), and now desire to amend and
restate the Original Agreement in its entirety as set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the terms below shall
have the following meanings. Any such term, unless the context otherwise
requires, may be used in the singular or plural, depending upon the reference.
"Affiliate" has the meaning set forth in the Exchange Act. Without
limiting the foregoing, all directors and officers of a Person that is a
corporation and all managing members of a Person that is a limited liability
company shall be deemed Affiliates of such Person for all purposes hereunder.
"Ancillary Agreements" means the Assignment of Contract Rights, the
Assignment of Lease, the Assignment of Intellectual Property Rights, the
Assumption Agreement, the Bill of Sale, the Employment Agreements, the Escrow
Agreement, the MediaSite Agreement, the Non-Competition Agreement, the
Transition Services Agreement, the Trademark License Agreement and the Voting
Agreement.
1
"Assigned Contracts" means (i) those Contracts listed on Schedule 1.3
under the heading `Assigned Contracts' other than those Contracts that, on or
before the Closing Date, Buyer notifies Seller in writing shall be excluded from
the Assigned Contracts (any Contracts that are set forth on such a notice shall
not constitute Assigned Contracts) and (ii) any other Seller Contracts not so
listed that Buyer, in its sole discretion, expressly elects in writing to accept
and assume.
"Assigned Leases" means those Leases listed on Schedule 1.3 under the
heading `Assigned Leases' and any other Leases not so listed which (i) relate to
the Business under which Seller has or may acquire any rights or benefits, or
(ii) by which Seller or any of the Purchased Assets or Assumed Liabilities is or
may become bound, which Buyer, in its sole discretion, expressly elects in
writing to accept and assume.
"Assignment of Contract Rights" means that certain assignment of
contract rights, substantially in the form attached hereto as Exhibit A, to be
entered into at Closing by Seller.
"Assignment of Leases" means that certain assignment of leases,
substantially in the form attached hereto as Exhibit B, to be entered into at
Closing by Seller.
"Assignment of Intellectual Property Rights" means, collectively, that
certain assignment of copyrights, substantially in the form attached hereto as
Exhibit C-1, that certain assignment of trademarks, substantially in the form
attached hereto as Exhibit C-2, that certain assignment of patents,
substantially in the form attached hereto as Exhibit C-3 and that certain
assignment of domain names, substantially in the form attached hereto as Exhibit
C-4 each to be entered into at Closing by Seller.
"Assumption Agreement" means that certain assumption agreement,
substantially in the form attached hereto as Exhibit D, to be entered into at
Closing by Buyer in favor of Seller.
"Balance Sheet" means the consolidated balance sheet of Seller and its
Subsidiaries dated the Balance Sheet Date, together with the notes thereon,
audited by Ernst & Young LLP, independent certified public accountants.
"Balance Sheet Date" means September 30, 2002.
"Benefit Arrangement" means any employment, consulting, severance or
other similar contract, plan, arrangement or policy, and each plan, arrangement
(written or oral), program, agreement or commitment providing for insurance
coverage (including any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation benefits,
retirement benefits, life, health, disability or accident benefits or for
deferred compensation, profit-sharing bonuses, stock options, stock purchases or
other forms of incentive compensation or post-retirement insurance, compensation
or benefits which (A) is not a Welfare Plan, Pension Plan or Multi-employer
Plan, and (B) is entered into, maintained, contributed to or required to be
contributed to, by Seller or an ERISA Affiliate or under which Seller or any
ERISA Affiliate may incur any liability.
2
"Best Efforts" means the diligent, reasonable and good faith efforts
that a prudent Person desirous of achieving a result would use in similar
circumstances to ensure that such result is achieved as expeditiously as
possible on commercially reasonable terms.
"Bill of Sale" means that certain bill of sale, substantially in the
form attached hereto as Exhibit E, to be entered into at Closing by Seller in
favor of Buyer.
"Books and Records" means (i) all records and lists of Seller and each
of its Subsidiaries pertaining to the Purchased Assets, (ii) all records and
lists pertaining to the Business or the customers, suppliers or personnel of, in
each case, Seller and each of its Subsidiaries, (iii) all product, business and
marketing plans of Seller pertaining to the Business and (iv) all books,
ledgers, files, reports, plans, drawings and operating records of every kind
maintained by Seller and each of its Subsidiaries pertaining to the Business,
but excluding the originals of the minute books and Tax Returns of Seller or any
of its Subsidiaries.
"Breach" means, and a breach of a representation, warranty, covenant,
obligation or other provision of this Agreement or any Ancillary Agreement will
be deemed to have occurred if there is or has been, any inaccuracy in or breach
of, or any failure to perform or comply with, such representation, warranty,
covenant, obligation or other provision.
"Business" means the software development, acquisition, licensing,
manufacturing, marketing and distribution businesses conducted by Seller for
Seller's desktop video and audio software business for digitizing, converting,
creating, editing and publishing of audio, video and/or multimedia content,
consisting of the various versions of CD Architect, Sound Forge, Sound Forge
Studio, Sound Forge XP, ACID Pro, ACID Music, Siren, Super Duper Music Looper,
Vegas Audio, Batch Converter, Noise Reduction, DVD Architect, VideoFactory,
Vegas Video, Vegas Plus DVD, and Viscosity, Seller's audio and video content
businesses, consisting of Loops for ACID and Vision Series, the business
relating to the Websites, the web software applications for the online store and
customer service and support components of the Seller's Websites, and all other
activities directly related to any of the foregoing businesses engaged in by
Seller as of the Closing Date; provided, however, that "Business" shall not
include activities that are related to Seller's Continuing Business and are
unrelated, other than on a tangential basis, to the items described in this
definition prior to this proviso. A list of the source code included with the
Business is listed on Schedule 1.6.
"Business Day" means any day of the year on which national banking
institutions in Los Angeles, California are open to the public for conducting
business and are not required or authorized to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Competing Transaction" means any (i) merger, consolidation, business
combination, or similar transaction involving Seller, any of its Subsidiaries or
the Business, (ii) sale, lease or other disposition directly or indirectly of
(a) all or a substantial portion of the Purchased Assets and/or the Business or
(b) assets of Seller or any of its Subsidiaries representing 50% or more of the
consolidated assets of Seller and its Subsidiaries, (iii) issuance, sale, or
other disposition of securities (or options, rights or warrants to purchase, or
securities
3
convertible into or exchangeable for, such securities) representing 25% or more
of the voting power of Seller, (iv) transaction in which any Person shall
acquire beneficial ownership, or the right to acquire beneficial ownership, or
any Group (as defined in the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of, 25% or
more of the outstanding voting stock of Seller or (v) any combination of the
foregoing (other than the transactions contemplated by this Agreement).
"Confidentiality Agreement" means that certain letter agreement, dated
October 30, 2002, related to, among other things, confidentiality and
non-disclosure, by and between Sony Pictures Digital Inc. (f/k/a Sony Pictures
Digital Entertainment Inc. and which is an Affiliate of Buyer) and Seller.
"Condition-Related Material Adverse Effect" or "Condition-Related
Material Adverse Change" means any effect, change, event, circumstance or
condition which, when considered either individually or with other effects,
changes, events or circumstances, has or causes a significant and substantial
adverse effect or change in (i) for purposes of Section 7.2 and Section
9.3(a)(iii), the condition (financial or other), business, results of
operations, assets, Liabilities, properties or operations of the Business taken
as a whole and/or the Purchased Assets taken as a whole or (ii) for purposes of
Section 7.1 and Section 9.3(a)(iv), the ability of Seller to consummate the
transactions contemplated hereby.
"Consent" means any approval, consent, ratification, waiver, or other
authorization (including any Permit).
"Contract" means any agreement, contract, note, loan, evidence of
indebtedness, purchase order, letter of credit, indenture, security or pledge
agreement, covenant not to compete, license, instrument, commitment, obligation,
promise or undertaking (whether written or oral and whether express or implied)
to which Seller is a party or is bound and which relates to the Business or the
Purchased Assets.
"Contract Rights" means all of the rights and, to the extent they are
Assumed Liabilities, obligations of Seller under the Assigned Contracts.
"Customer/User Data" means the lists and databases of the Persons who
are customers of the Business, have registered on-line with the Business or who
have subscribed on-line for services or products of the Business, including,
without limitation, through the Websites.
"Default" means (a) a breach of or default under any Contract or
Lease, (b) the occurrence of an event that with the passage of time or the
giving of notice or both would constitute a breach or default under any Contract
or Lease or (c) the occurrence of an event that with or without the passage of
time or the giving of notice or both would give rise to a right of termination,
renegotiation or acceleration under any Contract or Lease.
"Disclosure Schedule" means the schedule executed and delivered by
Seller to Buyer as of the Closing Date setting forth the exceptions to the
representations and warranties contained in Article IV and certain other
information called for by this Agreement. Unless otherwise specified, each
reference in this Agreement to any numbered schedule is a reference to the
corresponding numbered schedule which is included in the Disclosure Schedule.
4
"Employee Plans" means all Benefit Arrangements, Pension Plans and
Welfare Plans.
"Employment Agreements" means the employment agreements, substantially
in the forms attached hereto as Exhibit G-1, to be entered into at Closing by
Buyer and the Persons described in Section 7.2(h).
"Encumbrance" means any charge, claim, co-authorship, co-inventorship,
or co-ownership interest, condition, easement, equitable interest, lien, option,
pledge, security interest, right of first refusal or restriction of any kind
(including any restriction on use, voting, transfer (other than restrictions on
transfer imposed by federal and state securities laws), receipt of income or
exercise of any other attribute of ownership).
"Environment" means soil, land surface or subsurface strata, surface
waters (including navigable waters, ocean waters, streams, ponds, drainage
basins and wetlands), groundwater, drinking water supply, stream sediments,
ambient air (including indoor air), plant and animal life and any other
environmental medium or natural resource.
"Environmental, Health and Safety Liabilities" means any cost, damage,
expense, Loss, Liability, obligation, Remedial Action or other responsibility
arising from or under any Environmental Law or Occupational Safety and Health
Law.
"Environmental Law" means all applicable federal, state, district and
local rules or regulations promulgated thereunder and all orders, consent
orders, judgments, notices, notice requirements, agency guidelines or
restrictions and licenses, permits or demand letters issued, promulgated or
entered pursuant thereto, in effect on or prior to the Closing Date, relating to
pollution or protection of human health (including in the workplace) or the
Environment (including, without limitation, CERCLA).
"Environmental Permits" means all licenses, permits, approvals,
authorizations, consents or orders of, or filings with, any Governmental Body,
whether federal, state, local or foreign, required for the operation of the
facilities under Environmental Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor law, and regulations and rules issued pursuant to that
Act or any successor law.
"Exchange Act" means the Securities Exchange Act of 1934, as it may be
amended from time to time, and the rules and regulations promulgated thereunder.
"Excluded Assets," notwithstanding any other provision of this
Agreement, means the following assets of Seller which are not to be acquired by
Buyer pursuant to this Agreement:
(i) the original minute books, stock records and corporate seals
of Seller; provided that copies thereof have been delivered to Buyer;
5
(ii) all personnel records and other records that Seller is
required by Law to retain in original form; provided that, in each case,
copies thereof have been delivered to Buyer;
(iii) all rights of Seller under this Agreement or any of the
Ancillary Agreements; and
(iv) the property and assets set forth on Schedule 1.1.
(v) all assets that are not listed in Schedule 1.3 and that are
related solely to the Seller's Continuing Business; and
(vi) the following Subsidiaries and all property and assets used
by such Subsidiaries other than to the extent any such property and assets
relate to the Business or the Purchased Assets: (A) International Image
Services, Inc. and (B) Sonic Foundry Media Systems, Inc.
"Facilities" means all offices, warehouses, improvements and all other
related facilities used in connection with the Business.
"Facility Lease" means all of the leases of Facilities listed on
Schedule 4.11(a).
"Family Member" means, with respect to any individual (i) the
individual, (ii) the individual's spouse, (iii) any other natural Person who is
related to the individual or the individual's spouse within the second degree
(including adopted children) and (iv) any other natural Person who resides with
such individual.
"Financial Statements" means the Year-End Financial Statements and the
Interim Financial Statements.
"Former Facility" means each office, warehouse, improvement and all
related facilities that were owned or leased by Seller for the Business or any
of its Subsidiaries at any time in the three years prior to the Closing Date,
but excluding any Facilities.
"Funded Debt" means, as of the Closing Date, without duplication, (i)
all indebtedness of Seller and each of its Subsidiaries for borrowed money or
for the deferred purchase price of any property or services (other than current
trade liabilities incurred in the Ordinary Course of Business and payable in
accordance with customary practices), (ii) any other indebtedness of Seller or
any of its Subsidiaries which is evidenced by a note, bond, debenture or similar
instrument, (iii) all obligations of Seller and each of its Subsidiaries under
capital leases, except for those capital leases specifically listed in Schedule
1.4, (iv) any Liabilities of Seller or any of its Subsidiaries for any
brokerage, investment banking or similar fee in connection with the transactions
contemplated by this Agreement and the Ancillary Agreements, (v) all Liabilities
secured by any Encumbrance on any property owned by Seller or any of its
Subsidiaries whether or not Seller or any such Subsidiary has assumed or
otherwise become liable for the payment thereof, (vi) all guarantees of Seller
or any of its Subsidiaries, (vii) all Liabilities of Seller and each of its
Subsidiaries for overdrafts or outstanding checks, and (viii)
6
all accrued but unpaid interest, any premiums payable or any other charges on
any of the obligations set forth in clauses (i) through (viii) above.
"GAAP" means generally accepted accounting principles as used in the
United States, as in effect from time to time.
"Governmental Body" means any:
(i) nation, state, county, city, town, village, district or other
jurisdiction of any nature;
(ii) federal, state, local, municipal, foreign or other
government;
(iii) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official or entity
and any court or other tribunal);
(iv) multi-national organization or body; or
(v) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory or taxing authority or
power of any nature.
"Hazardous Activity" means the distribution, generation, handling,
importing, management, manufacturing, processing, production, refinement,
Release, storage, transfer, transportation, treatment or use (including any
withdrawal or other use of groundwater) of Hazardous Materials in, on, under,
about or from the Facilities or any part thereof into the Environment and that
increases the danger or risk of danger or poses an unreasonable risk of harm to
Persons or property on or off the Facilities or that may affect the value of the
Facilities or Seller.
"Hazardous Materials" means any waste or other substance that is
listed, defined, designated or classified as, or otherwise determined to be,
hazardous, radioactive, infectious, reactive, corrosive, ignitable, flammable or
toxic or a pollutant or a contaminant subject to regulation, control or
remediation under any Environmental Law (whether solids, liquids or gases),
including any mixture or solution thereof, and specifically including petroleum
and all derivatives thereof or synthetic substitutes therefor, polychlorinated
biphenyls, radon gas, urea formaldehyde and asbestos or asbestos-containing
materials.
"Insurance Policies" means the insurance policies related to the
Purchased Assets and listed on Schedule 4.20.
"Intellectual Property" means: (a) inventions and discoveries (whether
or not patentable and whether or not reduced to practice), improvements thereto,
and patents, patent applications, invention disclosures, and other rights of
invention, worldwide, including without limitation any reissues, divisions,
continuations and continuations-in-part, provisionals, reexamined patents or
other applications or patents claiming the benefit of the filing date of any
such application or patent; (b) trademarks, service marks, trade names, trade
dress, logos, domain
7
names, product names and slogans, including any common law rights,
registrations, and applications for registration for any of the foregoing, and
the goodwill associated with all of the foregoing, worldwide; (c) copyrightable
works, all rights in copyrights, including moral rights, copyrights, website
content, and other rights of authorship and exploitation, and any applications,
registrations and renewals in connection therewith, worldwide; (d) trade secrets
and confidential business and technical information, including, without
limitation, Customer/User Data Website user information, customer and supplier
lists and related information, pricing and cost information, business and
marketing plans, advertising statistics, any other financial, marketing and
business data, technical data, specifications, schematics and know-how; (e) to
the extent not covered by subsections (a) through (d), above, Software and
Websites (including all related computer code and content); (f) rights to
exclude others from appropriating any of such Intellectual Property, including
the rights to sue for and remedies against past, present and future
infringements of any or all of the foregoing and rights of priority and
protection of interests therein; and (g) any other proprietary, intellectual
property and other rights relating to any or all of the foregoing anywhere in
the world.
"Interim Balance Sheet" means the unaudited consolidated balance sheet
of Seller and its Subsidiaries dated the Interim Balance Sheet Date, together
with notes thereon.
"Interim Balance Sheet Date" means March 31, 2003.
"Interim Financial Statements" means the Interim Balance Sheet and the
unaudited statements of operations, changes in shareholders' equity and cash
flow for the period ended on the Interim Balance Sheet Date.
"Inventory" means all inventory held for resale by Seller (including
inventory held on consignment with third parties) and all of the raw materials,
work in process, finished products, wrapping, jewel cases, jewel case inserts
and labels, supply and packaging items and similar items of Seller with respect
to the Business, in each case, wherever the same may be located.
"IRS" means the Internal Revenue Service, a division of the United
States Treasury Department, or any successor thereto.
"Knowledge" means and an individual shall be deemed to have
"Knowledge" of a particular fact or other matter if:
(i) such individual is actually aware of such fact or other
matter; or
(ii) a prudent individual could be expected to discover or
otherwise become aware of such fact or other matter in the course of
conducting a reasonably comprehensive investigation concerning the
existence of such fact or other matter.
A Person (other than an individual and other than Seller) shall be
deemed to have "Knowledge" of a particular fact or other matter if any
individual who is serving, or who has at any time served as a director or
officer of such Person (or in any similar capacity) has, or at any time had,
Knowledge of such fact or other matter.
8
"Knowledge of Seller" or words of similar import means, with respect
to a particular fact or other matter, the Knowledge of Rimas P. Buinevicius
(Seller's Chairman and Chief Executive Officer), Kenneth A. Minor (Seller's
Chief Financial Officer), Curtis J. Palmer (Seller's Co-founder, Chief
Technology Officer & Director), Christopher C. Cain (Seller's Vice President and
General Counsel), Brad Reinke (Seller's General Manager), Caleb Pourchot
(Seller's Director of Engineering), and Monty Schmidt (Seller's President and
Director) and the actual knowledge of any other director or officer of Seller.
"Law" means any federal, state, local, municipal foreign,
international, multinational or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute or treaty.
"Leased Real Property" means all leased property described in the
Facility Leases.
"Leasehold Estates" means all of Seller's rights and obligations as
lessee under the Leases.
"Leasehold Improvements" means all leasehold improvements situated in
or on the Leased Real Property and owned by Seller.
"Leases" means all of the existing leases of Seller listed on Schedule
4.13(a) and not rejected by Buyer.
"Legal Proceeding" means any action, arbitration, audit, hearing,
investigation, litigation or suit (whether civil, criminal, administrative,
investigative or informal) commenced, brought, conducted or heard by or before,
or otherwise involving, any Governmental Body or arbitrator.
"Liabilities" means any direct or indirect liability, indebtedness,
obligation, commitment, expense, claim, deficiency, guaranty or endorsement of
or by any Person of any type, whether known or unknown, accrued, absolute,
contingent, matured, unmatured, liquidated or unliquidated or otherwise.
"Loss" means any claim, liability, obligation, loss, damage,
assessment, penalty, judgment, settlement, cost and expense, including costs
attributable to the loss of the use of funds to the date on which a payment is
made with respect to a matter of indemnification under Article VIII, and
including reasonable attorneys' and accountants' fees and disbursements incurred
in investigating, preparing, defending against or prosecuting any Claim.
"Material Adverse Effect" or "Material Adverse Change" means any
effect, change, event, circumstance or condition which, when considered either
individually or with other effects, changes, events or circumstances, has or
causes a significant and substantial adverse effect or change in the condition
(financial or other), business, results of operations, assets, Liabilities,
properties or operations of Seller, the Business and/or the Purchased Assets or
on the ability of Seller to consummate the transactions contemplated hereby.
9
"MediaSite Agreement" means that certain Agreement between Buyer and
Seller, substantially in the form attached hereto as Exhibit O, to be entered
into at Closing by Buyer and Seller, pursuant to which, among other things,
Seller shall provide certain media-related services to Buyer.
"Multiemployer Plan" means any "multiemployer plan" as defined in
Section 3(37) of ERISA.
"Non-Competition Agreements" means, collectively, that certain
Non-Competition Agreement between Buyer and Seller and the Non-Competition
Agreement between Buyer and Monty Schmidt (Seller's President and Director), in
the form attached hereto as Exhibit H-1 and Exhibit H-2, respectively, entered
into as of the Agreement Date, but to take effect, only immediately after the
Closing.
"Nova Litigation" means that certain litigation encaptioned Nova
Development Corporation v. Sony Pictures Digital Entertainment Inc.; Sonic
Foundry, Inc.; and Does 1-10, denominated Case No. 02-9407 AHM (MANx), currently
pending in the United States District Court, Central District of California,
Western Division (which was commenced on December 11, 2002), any and all claims,
counterclaims, damages, defenses, and/or offsets that are: (a) asserted in the
action by any party; (b) are related to any of the claims, allegations, acts,
events, or omissions alleged in the action; (c) are otherwise related to Nova
Development Corporation's Video Explosion Deluxe product; or (d) are otherwise
related to the right of Sony Pictures Digital Entertainment Inc. to sell the
Screenblast Video Factory line of products. In particular, but without
limitation, the term "Nova Litigation" shall expressly refer to Nova Development
Corporation's claims against Sony Pictures Digital Entertainment Inc. for
copyright infringement, declaratory judgment, intentional interference with
contract, unfair competition, negligent interference with contract; and
intentional/negligent interference with prospective economic advantage, and to
Nova's claims against Seller for breach of contract, promissory fraud, fraud,
unfair competition, intentional/negligent interference with prospective economic
advantage, and declaratory judgment.
"Occupational Safety and Health Law" means any Legal Requirement in
effect on or prior to the Closing Date designed to provide safe and healthful
working conditions and to reduce occupational safety and health hazards, and any
program, whether governmental or private (including those promulgated or
sponsored by industry associations and insurance companies), designed to provide
safe and healthful working conditions.
"Order" means any award, decision, consent decree, injunction,
judgment, order, ruling, subpoena or verdict entered, issued, made or rendered
by any court, administrative agency or other Governmental Body or by any
arbitrator.
"Ordinary Course of Business" or "ordinary course" or any similar
phrase means the usual and ordinary course of business of Seller, consistent
with its past custom and practice.
"Owned Real Property" means all interests in real property owned in
fee by Seller, including, without limitation, all rights, easements and
privileges appertaining or relating
10
thereto, all buildings, fixtures, and improvements located thereon and all
Facilities thereon, if any.
"Paid-Down Debt" means (i) all debt of Seller originally issued to
Omicron Partners, L.P., Deephaven Capital Management, Gryphon Master Fund L.P.,
Langley Partners L.P. and other investors in January and February of 2002 in the
original aggregate principal amount of $7,125,000 and all amounts (including,
without limitation, interest) associated therewith and (ii) the obligations
secured by that certain Collateral Pledge Agreement, dated November 18, 2002 and
the indebtedness evidenced by that certain Promissory Note, dated November 18,
2002, by Seller, as maker, in favor of Aris A. Buinevicius and Claire Horne,
husband and wife, as payee, and all amounts (including, without limitation,
interest) associated therewith.
"Pension Plan" means any "employee pension benefit plan" as defined in
Section 3(2) of ERISA (other than a Multiemployer Plan) which Seller or any
ERISA Affiliate maintains, administers, contributes to or is required to
contribute to, or has maintained, administered, contributed to or was required
to contribute to, or under which Seller or any ERISA Affiliate may incur any
liability.
"Permits" means any approval, Consent, license, permit, waiver or
other authorization issued, granted, given or otherwise made available by or
under the authority of any Governmental Body or any other Person or pursuant to
any Law necessary for the past, present or anticipated (but for the consummation
of the transactions contemplated hereby) future conduct of, or relating to, the
operation of the Business.
"Permitted Encumbrances" means the Encumbrances listed on Schedule
1.5.
"Permitted Exceptions" means (i) statutory liens for current taxes,
assessments or other governmental charges not yet delinquent or the amount or
validity of which is being contested in good faith by appropriate proceedings,
provided that an appropriate reserve is established therefor and such liens are
disclosed on Schedule 1.2; (ii) mechanics', carriers', workers', repairers' and
similar Liens arising or incurred in the Ordinary Course of Business that are
not material to the Business, the Purchased Assets, the operations and financial
condition of the property so encumbered or to Seller; (iii) zoning, entitlement
and other land use and environmental Laws by any Governmental Body, provided
that such Laws have not been violated; and (iv) those items listed on Schedule
1.2.
"Person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union or other entity
or Governmental Body.
"Purchased Assets" means all of Seller's right, title and interest in
and to the business, properties, assets and rights of any kind, whether tangible
or intangible, real or personal and constituting, or used in connection with, or
related to, the Business owned by Seller or in which Seller has any interest,
including, without limitation, all of the right, title and interest of Seller in
and to the following (but not including the Excluded Assets):
11
(i) all trade accounts receivable (whether current or
noncurrent), refunds, deposits, prepayments or prepaid expenses;
(ii) all Assigned Contracts and Contract Rights;
(iii) all Assigned Leases, Leasehold Estates and Leasehold
Improvements;
(iv) all Tangible Personal Property;
(v) all Inventory;
(vi) all Books and Records;
(vii) all Intellectual Property;
(viii) all Permits and pending applications therefor and renewals
thereof, including, without limitation, those Permits listed on Schedule
4.19, to the extent transferable;
(ix) all computers and, to the extent transferable, the Software
Rights;
(x) all insurance benefits, rights and/or proceeds arising from,
or related to, the Purchased Assets or the Assumed Liabilities with respect
to periods through the Closing Date;
(xi) all available supplies, sales literature, promotional
literature, customer, supplier and distributor lists and data, art work,
display units, telephone and fax numbers, Customer/User Data and purchasing
records;
(xii) all rights under or pursuant to all warranties,
representations and guarantees made by suppliers in connection with the
Purchased Assets or services furnished to Seller pertaining to the Business
or affecting the Purchased Assets;
(xiii) all claims, causes of action, choses in action, rights of
recovery and rights of set-off of any kind, against any Person, including,
without limitation, any Encumbrances or other rights to payment or to
enforce payment in connection with products delivered by Seller on or prior
to the Closing Date, whether now accrued or accruing in the future,
relating to the Purchased Assets;
(xiv) all goodwill and other intangible rights; and
(xvii) all properties, assets and rights set forth on Schedule
1.3 attached hereto.
"Release" means and includes any spilling, leaking, pumping, pouring,
injecting, emitting, discharging, depositing, escaping, leaching, migrating,
dumping or other releasing into
12
the Environment or the workplace, whether intentional or unintentional and
otherwise defined in any Environmental Law.
"Remedial Action" means all actions to (i) clean up, remove, treat or
in any other way address any Hazardous Material; (ii) prevent the Release of any
Hazardous Material so it does not endanger or threaten to endanger public health
or welfare or the indoor or outdoor environment; or (iii) perform pre-remedial
studies and investigations or post-remedial monitoring and care.
"Representative" means any officer, director, principal, attorney,
agent, employee or other representative.
"Seller Contracts" means all Contracts (i) relating to the Business
under which Seller has or may acquire any rights or benefits, (ii) relating to
the Business under which Seller has or may become subject to any obligation or
Liability or (iii) by which any of the Purchased Assets or Assumed Liabilities
is or may become bound.
"Seller's Continuing Business" means the Seller's Media Services
Business and the Seller's Media Systems Business.
"Seller's Media Services Business" means Seller's business of media
duplication, standards/format conversion, high definition mastering and
duplication, aspect ratio conversion, program content technical evaluation,
audio layback, digital restoration, digital preparation, MPEG and IP (internet
protocol) encoding services, media asset management, Business to Business web
sites relating to media asset management, vaulting/shipping/fulfillment,
services related to video production and post-production, Digital Rights
Management services, providing services and software to assist in a customer's
licensing and syndication of its program content, media workflow management, and
related consulting and other services all for the domestic and international
television and motion picture industries, and all other activities related
directly thereto. A list of the Intellectual Property of the Seller's Media
Services Business is listed on #3 to Schedule 1.1.
"Seller's Media Systems Business" means Seller's business of providing
rich media applications and scalable solutions for media and entertainment
companies as well as enterprises and government organizations, for navigation,
searching, indexing, publishing, speech recognition, image, speech and language
processing, creating, editing and capturing rich media presentations, deploying,
managing and distributing video, audio and multimedia content, software
development (of non-Business-related software), licensing, manufacturing,
marketing and distribution of the products currently sold as MediaSite Live and
Publisher, and all other activities directly related thereto. A list of the
source code included in the Seller's Media Systems Business is listed on
Schedule 1.7.
"Seller's Websites" means www.sonicfoundry.com, www.sfoundry.com,
www.sonic.com, and www.sofo.com (and all derivatives, including .net, .org, etc.
for each of the foregoing).
"Settlement Agreements" means (i) that certain Settlement Agreement
and Release, effective as of May 2, 2003, among Nova Development, Seller, and
SPD (the "Nova
13
Settlement") together with (ii) that certain side letter dated May 2, 2003
executed by Seller and SPD relating to Seller's and SPD's respective shares of
the payment called for in the Nova Settlement, among other provisions (the "Nova
Settlement Side Letter") and each of the Nova Settlement and the Nova Settlement
Side Letter is a "Settlement Agreement."
"SPD" means Sony Pictures Digital Inc., a Delaware corporation.
"Subsidiary" means any Person of which a majority of the outstanding
voting securities or other voting equity interests are owned, directly or
indirectly, by Seller.
"Superior Proposal" means a bona fide written proposal (on its most
recently amended or modified terms, if amended or modified) made by a Person
other than Seller or its Affiliates: (A) to consummate an Acquisition Proposal;
(B) on terms which the Board of Directors of Seller in good faith concludes
(following advice of its financial advisors that such proposal is more favorable
to Seller's stockholders, from a financial point of view, and advice of outside
counsel), taking into account, among other things, all legal, financial,
regulatory and other aspects of the proposal and the identity and nature of the
Person making the proposal, would, if consummated, result in a transaction that
is (i) more favorable to Seller or Seller's stockholders (in their capacities as
stockholders), as the case may be, from a financial point of view, than the
transactions contemplated by this Agreement (as the same may be proposed to be
amended by Buyer pursuant to Section 6.11(e)); and (ii) is reasonably likely to
be completed; and (C) that is fully financed.
"Tangible Personal Property" means all machinery, equipment, tools,
fixtures, furniture, office equipment, computer hardware, supplies, materials
and other items of tangible personal property (other than Inventory) of every
kind owned or leased by Seller (wherever located (including any Tangible
Personal Property in the possession of any of Seller's suppliers) and whether or
not carried on its books) and related to the Business, together with any express
or implied warranty by the manufacturers or sellers or lessors of any item or
component part thereof and all maintenance records and documents related
thereto.
"Taxes" means (i) all federal, state, provincial, local or foreign
taxes, charges, fees, imposts, levies or other assessments, including, without
limitation, all net income, gross receipts, capital, sales, use, escheat, ad
valorem, value added, transfer, franchise, profits, inventory, capital stock,
license, withholding, payroll, employment, health, social security,
unemployment, excise, workplace safety and insurance, severance, stamp,
occupation, property and estimated taxes, customs duties, fees, assessments and
charges of any kind whatsoever; (ii) all interest, penalties, fines, additions
to tax or additional amounts imposed by any taxing authority in connection with
any item described in clause (i); and (iii) any joint, several or transferee
liability in respect of any items described in clauses (i) and/or (ii) imposed
by any tax Laws.
"Tax Return" means all returns, declarations, reports, estimates,
information returns and statements required to be filed in respect of any Taxes,
and any amendments to any of the foregoing.
14
"Threatened" describes any claim, Legal Proceeding, dispute, action or
other matter if (i) any demand or statement has been made (orally or in writing)
with respect to such claim, Legal Proceeding, dispute, action or other matter or
(ii) any notice has been given (orally or in writing) with respect thereto.
"Threat of Release" means a substantial likelihood of a Release that
may require action in order to prevent or mitigate damage to the Environment
that may result from such Release.
"Trademark License Agreement" means that certain Trademark License
Agreement, substantially in the form attached hereto as Exhibit L, to be entered
into at Closing by Seller.
"Transition Services Agreement" means that certain Transition Services
Agreement by and between Buyer and Seller in the form attached hereto as Exhibit
I, to be entered into at Closing by Seller.
"Treasury Regulations" means the treasury regulations promulgated
under the Code.
"Voting Agreement" means that certain Voting Agreement by and among
Buyer, Seller, Rimas P. Buinevicius (Seller's Chairman and Chief Executive
Officer), Curtis J. Palmer (Seller's Co-founder, Chief Technology Officer &
Director) and Monty R. Schmidt (Seller's President and Director), dated as of
the Agreement Date and in the form attached hereto as Exhibit N.
"Websites" means (i) the Internet websites with the URLs
www.acidplanet.com, www.cdarchitect.com, www.soundforge.com, www.
acidgarbage.com, www.acidgarbage.net, www.musiclooper.com, www.musiclooper.net,
www.superdupermusiclooper.com, www.superdupermusiclooper.net,
www.sirenjukebox.com and www.dvdarchitect.com (including all derivatives,
including .net, .org, etc. of each of the foregoing) and (ii) the content, pages
and other portions of the Seller's Websites that are related to the Business
and/or the Purchased Assets.
"Welfare Plan" means any "employee welfare benefit plan" as defined in
Section 3(1) of ERISA which Seller or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or under which
Seller or any ERISA Affiliate may incur any Liability.
"Year-End Financial Statements" means the Balance Sheet and the
related audited statements of operations, changes in shareholders' equity and
cash flow for the fiscal year ended September 30, 2002.
1.2 Other Defined Terms; Other Definitional Provisions.
(a) Other Defined Terms. The following terms shall have the meanings
defined for such terms in the Sections set forth below:
15
Term Section
---- -------
AAA 9.6
Accountant 2.5(c)
Accounting Firm 2.8(d)
Acquisition Proposal 6.11(a)
Agreement Preamble
Agreement Date Preamble
Allocation 2.5(a)
Amendment Date Preamble
Appellate Arbitrators 9.6
Arbitrator 9.6
Assumed Liabilities 2.2
Business Employee Plans 4.14(a)
Buyer Preamble
Buyer Documents 5.2
Buyer Expenses 9.3(d)
Buyer Indemnified Parties 8.2(a)
Bylaws 4.4
Carved Out Balance Sheet 2.8(a)
Change of Recommendation 6.11(f)
Charter 4.4
Claim 8.4(a)
Claim Notice 8.4(a)
Closing 3.1
Closing Date 3.1
Closing Statement 2.8(a)
COBRA 6.6(d)
Commitments 4.12(m)
Consideration 2.4
Deferred Compensation Plan 6.6(i)
EMI Notice 2.3(n)
Environmental Damages 8.2(a)(vii)
ERISA Affiliate 6.6(d)
Escrow Agent 2.4
Escrow Agreement 2.4
Excluded Liabilities 2.3
Fairness Opinion 7.2(l)
Final Net Working Capital of the Business 2.8(e)
Former Superior Proposal 6.11(e)
Good Faith Deposit 2.4
Holdback Amount 8.6(a)
IP Participant 4.12(k)
LDC Trigger 9.15(a)
Liquidated Damages 9.15(a)
Losses 8.2(c)
Net Working Capital of the Business 2.8(e)
16
Term Section
---- -------
Non-Product Software 4.12(g)
Non-Product Software Rights 4.12(f)
Notice of Disagreement 2.8(c)
Nova Completion Date 8.6(c)
Original Agreement Preamble
Outside Date 9.3(a)
Potential Acquiror 6.11(d)
Potential Employees 6.6
Product-Related Software 4.12(g)
Product-Related Software Rights 4.12(f)
Proxy Materials 6.3(b)
Proxy Solicitor 6.3(d)
Rehired Employees 6.6(b)
SDAT 3.2
Seller Preamble
Seller Documents 4.2
Seller Indemnified Parties 8.2(b)
Settlement Losses 8.3
Software 4.12(g)
Software Rights 4.12(f)
Stockholders Meeting 6.3(a)
Superior Proposal Notice 6.11(d)
Termination Fee 9.3(d)
Threshold Amount 8.3
WARN Act 2.4(a)
(b) Any reference to an Article, Section, Exhibit or Annex is a
reference to an Article or Section of, or an Exhibit or Annex to, this
Agreement.
(c) Terms defined in the singular shall have a comparable meaning when
used in the plural, and vice versa.
(d) The words "include," "includes" and "including" mean include,
includes and including without limitation.
(e) All references to "related to," "relating to," "pertaining to,"
"in connection with" or similar phrases with respect to the Business or
Purchased Assets shall mean, without limitation, all matters directly or
indirectly related to, relating to, in relation to, pertaining to, involving,
concerning, with regards to, and in connection with, the Business or Purchased
Assets.
ARTICLE II
PURCHASE AND SALE OF ASSETS
2.1 Transfer of Purchased Assets. Upon the terms and subject to the
conditions contained in this Agreement, at the Closing, Seller shall sell,
assign, transfer, convey
17
and deliver to Buyer, and Buyer shall acquire from Seller, the Purchased Assets,
free and clear of all Encumbrances other than Permitted Exceptions.
2.2 Assumption of Liabilities. Upon the terms and subject to the
conditions contained in this Agreement, at the Closing, Buyer shall assume only
the following Liabilities of Seller (collectively, the "Assumed Liabilities"):
(a) All Liabilities accruing, arising out of, or relating to events or
occurrences happening after the Closing Date under the Business, Purchased
Assets, Assigned Contracts and Assigned Leases, but excluding any Liability for
any Default under any such Assigned Contract or Assigned Lease by Seller or any
of its Subsidiaries occurring on or prior to the Closing Date, all of which
Liabilities shall constitute Excluded Liabilities and excluding any Liabilities
related to the Business and the Purchased Assets that arise during, or relate
to, periods prior to the Closing Date;
(b) Any Liability to the customers of Seller incurred by Seller
accruing, arising out of, or relating to events or occurrences happening after
the Closing Date in the Ordinary Course of Business for non-delinquent orders of
the Purchased Assets outstanding as of the Closing Date reflected on the Books
and Records;
(c) Any Liability to the customers of Seller incurred by Seller
accruing, arising out of, or relating to events or occurrences happening after
the Closing Date under written warranty agreements given by Seller in the
Ordinary Course of Business prior to the Closing Date relating to the Business,
but not including any Liability for any Default under any such warranty
agreement by Seller or any of its Subsidiaries and/or occurring on or prior to
the Closing Date; and
(d) The accounts payable set forth and described in reasonable detail
on Schedule 2.2.
2.3 Excluded Liabilities. Notwithstanding any other provision of this
Agreement, Buyer shall not assume, or otherwise be responsible for (and nothing
in this Agreement or any Ancillary Agreement shall be construed as imposing on
Buyer), (i) any Liabilities of any Subsidiary of Seller, and (ii) except for the
Assumed Liabilities expressly specified in Section 2.2, any Liabilities of
Seller, in each case, whether arising out of occurrences prior to, at or after
the Closing Date (the "Excluded Liabilities"), which Excluded Liabilities
include, without limitation, the following:
(a) Any Liability of Seller or its ERISA Affiliates to or in respect
of any employee, former employee or other service provider of Seller, including,
without limitation, (i) any Liability under any employment agreement or
severance plan or agreement, whether or not written, between Seller or any of
its Subsidiaries and any Person (including, without limitation, under (A) that
certain Employment Agreement, dated January 1, 2001, between Seller and Rimas
Buinevicius (as amended), (B) that certain Employment Agreement, dated January
1, 2001, between Seller and Monty Schmidt (as amended) and (C) that certain
Employment Agreement, dated January 1, 2001, between Seller and Curtis Palmer
(as amended)), (ii) any Liability under any Employee Plan at any time
maintained, contributed to or required to be contributed to by or
18
with respect to Seller or under which Seller or any of its Subsidiaries may
incur Liability, or any contributions, benefits or Liabilities therefor, or any
Liability with respect to the withdrawal or partial withdrawal by Seller, any
Subsidiary or any ERISA Affiliate from or termination of any Employee Plan and
(iii) any claim related in any way to employment, termination of employment, pay
equity, equal employment opportunity, discrimination, harassment, retaliation,
wrongful termination, immigration, wages, hours, benefits, terms and conditions
of employment, collective bargaining, the payment of social security and similar
Taxes, occupational health and safety, and plant closing, including without
limitation claims relating in any way to the Worker Adjustment and Retraining
Notification Act (the "WARN Act"), 29 U.S.C.(S)(S) 2101 et seq., workers'
compensation, and the Wisconsin Business Closing and Mass Layoff Law, Wis.
Stat.(S)(S) 109.07 et seq. and the Employment Standards Act, 2000, S.O. 2000 c.
41;
(b) Any Liability of Seller in respect of any Tax;
(c) Any Liability of Seller arising from any injury to or death of any
Person or damage to or destruction of any property, whether based on negligence,
breach of warranty, strict liability, enterprise liability or any other legal or
equitable theory arising from defects in products manufactured or from services
performed by or on behalf of Seller on or prior to the Closing Date;
(d) Any Liability of Seller under any Assigned Contract or Assigned
Lease (i) accruing, arising out of, or relating to events or occurrences on or
prior to the Closing Date, (ii) that arises after the Closing Date but that
arises out of or relates to any Default by Seller or any of its Subsidiaries
and/or that occurred prior to the Closing Date or (iii) that was not incurred by
Seller or any Subsidiary in the Ordinary Course of Business;
(e) Any Liability of Seller under any Contract or Lease that not is an
Assigned Contract or Assigned Lease;
(f) Any Liability of Seller arising out of or resulting from its
compliance or noncompliance with any Law or Order;
(g) Any Liability of Seller arising out of or related to any Legal
Proceeding against it or any Legal Proceeding which adversely affects the
Purchased Assets or the Business and which was asserted on or prior to the
Closing Date or to the extent the basis of which arose on or prior to the
Closing Date;
(h) Any Liability of Seller resulting from entering into, performing
its obligations pursuant to or consummating the transactions contemplated by,
this Agreement or any Ancillary Agreement (including, without limitation, any
Liability of Seller pursuant to Article VIII of this Agreement);
(i) Any Liability of Seller to or in respect of any former or current
shareholders of Seller or any other holder of equity interests of Seller,
including, without limitation, relating to this Agreement, any Ancillary
Agreement or the transactions contemplated hereby and thereby;
19
(j) Any Liability of Seller relating to any Former Facility;
(k) Any Liability of Seller for any Funded Debt;
(l) Any Liability of Seller arising out of any environmental or health
and safety claims, costs or damages or for violation of Environmental Laws or
Occupational Safety and Health Laws pertaining to the Purchased Assets or the
Business, which relate to conditions or events occurring or commencing prior to
the Closing Date, including, without limitation, claims, costs or damages
relating to any Environmental, Health and Safety Liabilities;
(m) Any Liability of Seller relating to any Seller's Continuing
Business;
(n) Any Liability of Seller for any (i) indemnification obligations
pursuant to any claim or notice received prior to the Closing Date with respect
to any Intellectual Property, including, without limitation, any Liabilities
directly or indirectly related to the letter, dated October 4, 2002, from EMI to
Seller relating to remixing technology (the "EMI Notice") and (ii) losses or
Liabilities incurred in connection with, arising out of, resulting from or
incident to any allegations or claims of infringement or misappropriation of any
Intellectual Property covered by, or related to, the EMI Notice, including,
without limitation, Patent No. 5,801,694;
(o) Any Liability of Seller accruing, arising out of, or relating to
events or occurrences happening on or prior to, or to periods prior to, the
Closing Date; and
(p) Any Liability that is not an Assumed Liability.
2.4 Consideration. At the Closing, in exchange for the sale,
assignment, transfer, conveyance and delivery from Seller of the Purchased
Assets in accordance with Section 2.1 and the Non-Competition Agreement and the
other Ancillary Agreements, SPD shall, or SPD shall cause Buyer to: (i) deliver
an aggregate amount of Nineteen Million Dollars ($19,000,000) (the
"Consideration"), which Consideration shall be paid by wire transfer of
immediately available funds to an account designated by Seller (which account
shall be designated at least three Business Days prior to the Closing) and (ii)
assume the Assumed Liabilities pursuant to this Agreement; provided, however,
that (a) any portion of the Consideration withheld by Buyer and paid to Tax
authorities in accordance with applicable Laws, (b) any portion of the
Consideration withheld by Buyer as the Holdback Amount pursuant to Section 8.6,
and (c) any portion of the Consideration paid directly to the holders of
Paid-Down Debt, at Seller's request, to payoff amounts owing (for interest,
principal or otherwise) under the Paid-Down Debt shall, in each case, be treated
as having been delivered for purposes of this Section 2.4.
Good Faith Deposit. Simultaneously with the execution of the Original
Agreement, the Buyer deposited with Cupertino National Bank & Trust dba Greater
Bay Trust Company (the "Escrow Agent") cash in the amount of Nine Hundred
Thousand Dollars ($900,000) (the "Good Faith Deposit") pursuant to an Escrow
Agreement substantially in the form of Exhibit F hereto (the "Escrow
Agreement"). The Good Faith Deposit and any interest credited thereon to the
Closing Date will be credited against the Consideration at Closing. If the
transaction contemplated hereby does not close by the Outside Date solely as a
result of the Buyer's failure to perform, or decision not to perform, its
obligations under this Agreement in all
20
material respects, the Escrow Agent will distribute to Seller the Good Faith
Deposit to and interest credited thereon as liquidated damages in lieu of any
other remedy of Seller against Buyer, except as otherwise specifically set forth
in this Agreement. If the transaction contemplated hereby does not close by the
Outside Date as a result or events, or for reasons not solely attributable to
the Buyer's failure to perform its obligations under this Agreement in all
material respects, the Escrow Agent will return the Good Faith Deposit and
interest credited thereon to the date of such return to the Buyer.
2.5 Allocation of Consideration.
(a) The Consideration (including, for purposes of this Section 2.5,
the Assumed Liabilities and other items, in each case, to the extent properly
taken into account under applicable Treasury Regulations) shall be allocated
among the Purchased Assets and, unless the parties agree otherwise, the
Non-Competition Agreement and the other Ancillary Agreements owned by Seller in
the manner required by Section 1060 of the Code as set forth in Exhibit J
attached hereto (such Exhibit, as amended as hereinafter provided, the
"Allocation").
(b) If, based upon information received after the Agreement Date
relating to the value of the Purchased Assets (other than the ascertainment of
any Adjustment Amount), Buyer determines that the Allocation is incorrect, Buyer
may propose amendments to the Allocation as Buyer may determine to be
appropriate based upon such information. If, within ten (10) days of Buyer's
delivery to Seller of proposed amendments to the Allocation, Seller does not
deliver to Buyer a written objection to such proposed amendments to the
Allocation, the Allocation shall be amended as proposed by Buyer. If Seller
shall so object to Buyer's proposed amendments to the Allocation, Seller and
Buyer shall thereafter cooperate in good faith to resolve any dispute over
Buyer's proposed amendments to the Allocation, and the Allocation shall be
amended in the manner as may be agreed upon by the parties. If, within fifteen
(15) days after Seller delivers to Buyer Seller's written objection to Buyer's
proposed amendments to the Allocation, the parties cannot agree on an amended
Allocation as provided in the preceding sentence, then such dispute shall
promptly be submitted by the parties for resolution in a manner consistent with
the procedures set forth in Section 2.5(c), and the Allocation shall be amended
pursuant to such resolution.
(c) Buyer and Seller shall use their respective Best Efforts for a
period of thirty (30) days after Seller's delivery of a written objection to
Buyer's proposed amendments to the Allocation (or such longer period as Buyer
and Seller shall mutually agree upon) to resolve any disagreements raised by
Seller with respect thereto. If, at the end of such period, Buyer and Seller are
unable to resolve such disagreements, PricewaterhouseCoopers LLP and Ernst &
Young LLP, independent auditors of Buyer and Seller, respectively, shall jointly
select a third independent auditor of recognized national standing (the
"Accountant") to resolve any remaining disagreements. The Accountant will make
its determination based solely on presentations made by Buyer and Seller (made
or provided by each party to the other at the same time it is made or provided
to the Accountant) and not by independent review. It is the intent of the
parties hereto that the process set forth in this Section 2.5(c) and the
activities of the Accountant in connection herewith is not intended to be and,
in fact, is not an arbitration and that no formal arbitration rules shall be
followed (including rules with respect to procedures and discovery). The
determination by the Accountant shall be final, binding and conclusive on the
parties. Buyer and
21
Seller shall use their Best Efforts to cause the Accountant to make its
determination within thirty (30) days of accepting its engagement. The fees and
expenses of the Accountant shall be borne equally by Buyer and Seller.
(d) Buyer and Seller agree to each prepare and file on a timely basis
with the IRS substantially identical initial, supplemental and, if required,
amended Forms 8594 "Asset Acquisition Statements Under Section 1060" consistent
with the Allocation. Unless otherwise required by a "determination" as defined
in Section 1313(a) of the Code, Buyer and Seller further agree to be bound by
the Allocation and to take no tax or accounting position that is inconsistent
with the Allocation. Notwithstanding anything in this Section 2.5 to the
contrary, the Allocation (and any adjustments thereto) shall be made in the
manner required by Section 1060 of the Code. Notwithstanding any other
provisions of this Agreement, this Section 2.5 shall survive the Closing Date
without limitation.
2.6 Prorations.
(a) Interest. On the Closing Date, or as promptly as practicable
following the Closing Date, but in no event later than sixty (60) calendar days
thereafter, all prepaid interest and interest payable with respect to any
interest bearing obligations assumed by Buyer hereunder shall be prorated
between Buyer and Seller as of the Closing Date.
(b) Utilities; Taxes. On the Closing Date, or as promptly as
practicable following the Closing Date, but in no event later than sixty (60)
calendar days thereafter, the real and personal property taxes, water, gas,
electricity and other utilities, common area maintenance reimbursements to
lessors, local business or other license fees or taxes and other similar
periodic charges payable with respect to the Purchased Assets or the Business
shall be prorated between Buyer and Seller effective as of the Closing Date. To
the extent practicable, utility meter readings for the Facilities shall be
determined as of the Closing Date. If the real property tax rate for the current
tax year is not established by the Closing Date, the prorations shall be made on
the basis of the rate in effect for the preceding tax year and shall be adjusted
when the exact amounts are determined. All such prorations shall be based upon
the most recent available assessed value of any Facility prior to the Closing
Date or upon certified and verifiable statements provided by the landlord(s) of
any Facilities.
2.7 Closing Costs; Transfer Taxes and Fees. Seller shall be
responsible for any documentary and transfer Taxes and any sales, use or other
Taxes imposed by reason of the transfers of the Purchased Assets provided under
this Agreement and any deficiency, interest or penalty asserted with respect
thereto. Seller shall pay the fees and costs of recording or filing all
applicable conveyancing instruments described in Section 3.2(a). Seller shall
pay all costs of applying for new Permits and obtaining the transfer of existing
Permits which may be lawfully transferred.
2.8 Net Working Capital Adjustment.
(a) As promptly as practicable, but no later than forty-five (45) days
after the Closing Date, Seller shall prepare (or cause to be prepared) and
deliver to Buyer for review, a closing statement (the "Closing Statement"),
setting forth Seller's calculation of the Net Working
22
Capital of the Business as of the close of business of the Closing Date. The
"Net Working Capital of the Business" shall mean the Current Assets (as defined
below) that are Purchased Assets less the Assumed Liabilities that are current
liabilities. For purposes of this Section 2.8, "Current Assets" means assets
expected to be converted into cash within one year, including, without
limitation, net accounts receivable, inventory, prepaid expenses and refundable
deposits, but not including fixed assets.
(b) Buyer shall cause the employees of the Business to assist Seller
and its accountants in the preparation of the Closing Statement and shall
provide Seller and its auditors reasonable access, during normal business hours
and upon reasonable prior notice, to the personnel, properties, books and
records of the Business for such purpose.
(c) During the twenty (20)-day period following Buyer's receipt of the
Closing Statement, Buyer and its auditors shall be permitted to review the
working papers relating to the Closing Statement (provided that Buyer and its
accountants execute and deliver a confidentiality agreement, reasonably
satisfactory to Seller and to Buyer, and adhere to whatever procedures the
Seller reasonably requests to safeguard confidential, non-public or privileged
information relating to the Seller or any of its subsidiaries), and Seller shall
cooperate with Buyer and its auditors to provide them with any other information
used in preparing the Closing Statement reasonably requested by Buyer or its
auditors. The Closing Statement shall become final and binding upon the parties
on the 20th day following delivery thereof, unless Buyer delivers to Seller
written notice of its disagreement ("Notice of Disagreement") specifying in
reasonable detail the amount by which and the reasons why it believes the
Closing Statement (i) contains mathematical errors or (ii) was not prepared in
accordance with the methodology specified in Section 2.8(g). The Notice of
Disagreement shall not specify any basis for disagreement with the Closing
Statement other than as set forth in the preceding sentence.
(d) If a timely and otherwise sufficient Notice of Disagreement shall
be delivered to Seller in accordance with Section 2.8(c), Buyer and Seller
shall, during the twenty (20) days following such delivery, seek in good faith
to resolve in writing any differences which they may have with respect to the
matters specified in the Notice of Disagreement. If during such twenty (20)-day
period Buyer and Seller agree in writing on the correct determination of the
Closing Statement, such determination shall be final and binding on the parties
for all purposes hereunder. If Buyer and Seller have not resolved such
differences by the end of such twenty (20)-day period, Buyer and Seller shall
promptly submit, in writing, to an independent public accounting firm (the
"Accounting Firm") their briefs detailing their views as to the correct amount
of Net Working Capital of the Business as of the Closing Date, and the
Accounting Firm shall determine the final amount of Net Working Capital of the
Business as of the Closing Date, which determination shall be final and binding
on the parties for all purposes hereunder. The Accounting Firm shall be a
recognized, national independent public accounting firm as shall be agreed upon
by the parties hereto in writing. Buyer and Seller shall use commercially
reasonable efforts to cause the Accounting Firm to issue a report setting forth
its calculation of the Closing Statement, as promptly as practicable, but in any
event within thirty (30) days following the submission of the matters. The fees
and expenses of the Accounting Firm pursuant to this Section 2.8(d) shall be
borne equally by Buyer, on the one hand, and Seller, on the other hand. The fees
and disbursements of the auditors and other advisors of each party hereto
incurred in
23
connection with their review of the Closing Statement and review of any Notice
of Disagreement shall be borne by such party.
(e) The Consideration shall be decreased or increased, as applicable,
by the amount by which Net Working Capital of the Business set forth on the
carved out balance sheet of Seller as of February 28, 2003 (the "Carved Out
Balance Sheet") (which Carved Out Balance Sheet is attached hereto as Schedule
2.8(e)) net of any assets that are not bona fide Purchased Assets (and net of
any amounts payable to Seller by any directors, officers, or employees of
Seller) exceeds or is less than, as the case may be, the Final Net Working
Capital of the Business. The "Final Net Working Capital of the Business" means
the Net Working Capital of the Business (i) as shown on the Closing Statement
pursuant to Section 2.8(a) if no timely and otherwise sufficient Notice of
Disagreement is delivered to Seller in accordance with Section 2.8(c) or (ii) if
a timely and otherwise sufficient Notice of Disagreement is delivered to Seller
in accordance with Section 2.8(c), as determined pursuant to Section 2.8(d).
(f) Within three (3) Business Days after the Final Net Working Capital
of the Business has been determined pursuant to this Section 2.8, Seller shall
pay to Buyer the amount of any decrease in the Consideration or Buyer shall pay
to Seller the amount of any increase in the Consideration, as the case may be,
together in either case with an amount equal to interest thereon at the rate of
6.0% per annum from the Closing Date to and including the date of payment, by
intra-bank transfer or wire transfer of immediately available funds to any
account designated in writing by the party or parties entitled to such payment.
(g) Notwithstanding anything in this Agreement to the contrary, for
the purposes of this Section 2.8, Net Working Capital of the Business shall be
determined in accordance with GAAP, applied on a basis consistent with the
application of GAAP in the preparation of the Interim Balance Sheet and the
Carved Out Balance Sheet, and except as otherwise specified in Schedule 2.8. The
calculation of Final Net Working Capital of the Business shall be prepared in a
manner consistent with the manner in which the Carved-Out Balance Sheet is
prepared, including, without limitation, in connection with the assumptions
regarding allocations of accounts payable between the Business and the Seller's
Continuing Business.
ARTICLE III
CLOSING
3.1 Closing. The closing of the transfer of the Purchased Assets
provided for in Section 2.1 (the "Closing") shall take place at 10:00 a.m. local
time on the date that is three Business Days after the date on which the last of
the conditions set forth in Article VII hereof is either satisfied or waived
(the "Closing Date") at the offices of Latham & Watkins LLP located at 633 W.
Fifth Street, Suite 4000, Los Angeles, California, 90071, or at such other place
as Seller and Buyer may mutually agree.
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3.2 Conveyances at Closing.
(a) Deliveries to Buyer. At the Closing, Seller shall deliver, or
cause to be delivered, to Buyer, the following:
(i) the Assignment of Contract Rights, executed by Seller;
(ii) the Assignment of Leases, executed by Seller;
(iii) the Assignment of Intellectual Property documents, each
executed by Seller and in recordable form to the extent necessary to assign
the Intellectual Property;
(iv) the Bill of Sale, executed by Seller;
(v) the Books and Records of Seller;
(vi) a certified copy of the Charter and a certificate of good
standing with respect to Seller, issued by the State Department of
Assessment and Taxation of Maryland ("SDAT");
(vii) an opinion of counsel to Seller, dated the Closing Date,
substantially in the form attached hereto as Exhibit K;
(viii) the Fairness Opinion to Seller, dated April 26, 2003;
(ix) a payoff certificate from Omicron Master Trust, Deephaven
Capital Management, Gryphon Master Fund, L.P. and Langley Partners, L.P.,
each a holder of Paid-Down Debt (and collectively holders of Paid-Down Debt
in an original aggregate principal amount of $5,875,000), in each case, in
form and substance that is reasonably satisfactory to Buyer and sufficient
to indicate that the applicable Paid-Down Debt has either (a) been paid in
full prior to the Closing Date or (b) will be paid in full upon the payment
of a specified amount to an account specified by such holder (pursuant to
payment instructions included in such payoff certificate) on the Closing
Date;
(x) a payoff certificate from Aris A. Buinevicius and Claire
Horne, husband and wife, as payee of the indebtedness evidenced by that
certain Promissory Note, dated November 18, 2002 and the secured party
under that Certain Collateral Pledge Agreement, dated November 18, 2002, in
form and substance that is reasonably satisfactory to Buyer and sufficient
to indicate that the applicable Paid-Down Debt has either (a) been paid in
full prior to the Closing Date or (b) will be paid in full upon the payment
of a specified amount to an account specified by such holder (pursuant to
payment instructions included in such payoff certificate) on the Closing
Date;
(xi) the Transition Services Agreement, executed by Seller;
(xii) the Employment Agreements, executed by each party to such
Employment Agreement other than Buyer;
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(xiii) the Trademark License Agreement, executed by all parties
thereto other than Buyer;
(xiv) the Non-Competition Agreements, executed by all parties
thereto other than Buyer;
(xv) the Voting Agreement, executed by all parties thereto other
than Buyer;
(xvi) the MediaSite Agreement, executed by Seller;
(xvii) all source code related to the Business and/or the
Purchased Assets (in an electronic format reasonably acceptable to Buyer);
(xviii) executed UCC Termination Statements for all UCC Financing
Statements filed in connection with the Paid-Down Debt;
(xix) executed UCC Assignments for all UCC Financing Statements
related to any Permitted Encumbrances for the UCC Financing Statements
securing items other than the Paid-Down Debt (and that are Assumed
Liabilities); and
(xx) such other documents and such deeds, bills of sale,
assignments, certificates of title and other instruments of conveyance and
transfer as Buyer may reasonably request to evidence compliance with the
conditions to this Agreement or which may otherwise be necessary to effect
the transactions contemplated by this Agreement.
(b) Deliveries to Seller. At the Closing, Buyer shall deliver, or
cause to be delivered, to Seller, the following:
(i) the Assumption Agreement, executed by Buyer;
(ii) the Transition Services Agreement, executed by Buyer;
(iii) the Non-Competition Agreements, executed by Buyer;
(iv) the Trademark License Agreement, executed by Buyer;
(v) the Voting Agreement, executed by Buyer; and
(vi) the MediaSite Agreement, executed by Buyer.
3.3 SDAT Filing. As soon as practicable following the Closing, the
parties shall file with the SDAT Articles of Transfer in the form required under
Maryland law.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer that, except as
otherwise set forth in the Disclosure Schedule, the statements contained in this
Article IV are true and correct as of the Agreement Date and as of the Closing
Date, except that the statements contained in Sections 4.2 (Authorization;
Enforceability), 4.5 (Conflicts; Third Party Consents), 4.9 (Absence of Certain
Changes or Events) and 4.27 (No Other Agreements) shall be true and correct as
of the Agreement Date, the Amendment Date and as of the Closing Date.
4.1 Organization and Good Standing. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland and has all requisite power and authority to own, lease and operate its
properties and assets and to carry on the Business as it is presently being
conducted. Seller is duly qualified or authorized to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction listed
on Schedule 4.1, such jurisdictions being all the jurisdictions in which its
conduct of the Business or the ownership of its properties makes such
qualification or authorization necessary. Copies of the Charter and Bylaws of
Seller, and all amendments thereto, heretofore delivered to Buyer are accurate
and complete as of the Agreement Date.
4.2 Authorization; Enforceability. Seller has all requisite power and
authority, and has taken all action necessary, to execute and deliver this
Agreement and each Ancillary Agreement to which it is a party and each other
agreement, document, instrument or certificate contemplated by this Agreement
and/or any Ancillary Agreement or to be executed by Seller in connection with
the consummation of the transactions contemplated by this Agreement, including,
without limitation, each of the documents set forth in Section 3.2(a) (such
other agreements, documents, instruments and certificates required to be
executed by Seller being referred to herein, collectively, as the "Seller
Documents"), and, subject only to the satisfaction of the conditions, other than
conditions that are within the control of Seller, to Seller's obligations to
close the transfer of the Purchased Assets, to consummate the transactions
contemplated hereby and thereby. This Agreement and each of the Seller Documents
have been duly and validly executed and delivered by Seller and this Agreement
and each of the Seller Documents on the Closing Date shall constitute, valid and
legally binding obligations of Seller, enforceable against Seller in accordance
with their respective terms, in each case, except as such enforceability may be
limited by (a) bankruptcy, insolvency, moratorium, reorganization and other
similar laws affecting creditors' rights generally and (b) the general
principles of equity, regardless of whether asserted in a proceeding in equity
or at law.
4.3 Capitalization; Subsidiaries.
(a) The authorized capital of (i) Seller immediately prior to the
Closing consists solely of (A) 100,000,000 shares of common stock, par value
$.01 per share, of which 27,784,509 shares are issued and outstanding and
constitute the stock of Seller, (B) 5,000,000 shares of preferred stock, par
value $.01 per share, of which no shares are issued and outstanding, and (C)
10,000,000 shares of Series B 5% cumulative convertible preferred stock, par
value of $.01 par value per share, of which no shares are issued and
outstanding. All of the
27
outstanding shares of stock and other equity interests of Seller are duly
authorized, validly issued, fully paid and non-assessable. None of the
outstanding stock or equity interests or other securities of Seller was issued
in violation of any Laws.
(b) Other than Sonic Foundry Canada, Inc., an Ontario Canada
corporation, whose employees worked on DVD Architect and whom now are employed
by International Image Services, Inc., an Ontario Canada corporation, none of
the Subsidiaries have, at any time, conducted or engaged in any part of the
Business or owned, or except as set forth on Schedule 4.3, licensed or otherwise
used, any of the Purchased Assets. International Image Services, Inc. is a
Subsidiary of Seller. Sonic Foundry Canada, Inc. was a Subsidiary of Seller
until it contributed all of its assets, liabilities and other obligations to
International Image Services, Inc. (and International Image Services, Inc.
assumed such liabilities and other obligations) on or about November 30, 2002.
4.4 Books and Records. Seller has made and kept (and made available to
Buyer) Books and Records and accounts, which, in reasonable detail, accurately
and fairly reflect the activities of Seller pertaining to the Business. Seller
has delivered to Buyer true, correct and complete copies of (a) the articles of
incorporation of Seller (as certified by the Secretary of State of Maryland, the
"Charter") and (b) the bylaws of Seller (as certified by the secretary,
assistant secretary or other appropriate officer of Seller, the "Bylaws"), in
each case, as currently in effect. Since January 1, 1998, and to Seller's
Knowledge before January 1, 1998, Seller has not, in any manner that pertains
to, or could affect, the Business or the Purchased Assets, engaged in any
transaction, maintained any bank account or used any corporate funds except for
transactions, bank accounts and funds which have been and are reflected in the
normally maintained Books and Records of Seller which have been provided to
Buyer.
4.5 Conflicts; Third Party Consents.
(a) Except as set forth on Schedule 4.5(a), assuming all Consents
described in Schedule 4.5(b) have been obtained or made, as applicable, the
execution, delivery and performance of this Agreement and the Seller Documents
by Seller shall not, directly or indirectly (with or without notice or lapse of
time):
(i) contravene, conflict with or result in a violation of (A) any
provision of the Charter or Bylaws of Seller or (B) any resolution or other
action adopted or taken by the board of directors or the shareholders of
Seller;
(ii) contravene, conflict with or result in a violation of, or
give any Governmental Body or other Person the right to challenge, any of
the transactions contemplated by this Agreement, any Ancillary Agreement or
the Seller Documents or to exercise any remedy or obtain any relief under,
any Law or any Order to which Seller or any assets owned or used by Seller,
may be subject;
(iii) contravene, conflict with or result in a violation of any
of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Permit that is
held by Seller or that otherwise
28
relates to the Business of, or any of the assets owned or used by, Seller
or any of its Subsidiaries;
(iv) contravene, conflict with or result in a violation or breach
of any provision of, or give any Person the right to declare a Default or
exercise any remedy under, or to accelerate the maturity or performance of,
or to cancel, terminate or modify, any Contract of Seller;
(v) result in the imposition or creation of any Encumbrance upon
or with respect to any of the Purchased Assets; or
(vi) result in any breach of, or constitute a Default (or event
which with the giving of notice or lapse of time, or both, would become a
Default) under, or give to any Person any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of any
Encumbrance on any of the Purchased Assets, any note, bond, mortgage,
indenture, Contract, agreement, Lease, license, Permit, franchise or other
instrument to which Seller or any of its Subsidiaries is a party or by
which any of the Purchased Assets are bound, except for purposes of clauses
(ii)-(v) above, for contraventions, conflicts, violations, revocations,
withdrawals, suspensions, modifications, breaches, Defaults, rights of
termination, amendment, acceleration or cancellation, or creations of
Encumbrances, that would not, individually or in the aggregate, have a
Material Adverse Effect.
(b) Except as set forth in Schedule 4.5(b), execution and delivery of
this Agreement and the Seller Documents by Seller and the consummation of the
transactions contemplated hereby and thereby does not, and shall not require any
Consent, or other action by, or filing with or notification to, any Governmental
Body or any other Person.
4.6 Financial Statements.
(a) Attached hereto as Annex I and Annex II are the Year-End Financial
Statements and the Interim Financial Statements, respectively.
The Year End Financial Statements have been prepared from the Books and Records
and fairly and accurately present the financial condition and the results of
operations, income, expenses, assets, Liabilities (including all reserves),
changes in shareholders' equity and cash flow of Seller and its Subsidiaries as
of the respective dates of, and for the periods referred to in, such Year End
Financial Statements, in accordance with GAAP applied on a consistent basis
throughout the periods indicated. The Interim Financial Statements and the
Carved Out Balance Sheet have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by GAAP for complete financial statements.
(b) Each of Seller and its Subsidiaries maintains a standard system of
accounting established and administered in accordance with GAAP.
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(c) The allocation between the Business and the Seller's Continuing
Business of results of operations, income, expenses, assets, Liabilities
(including all reserves), changes in shareholders' equity and cash flow as set
forth in the Financial Statements and the Interim Financial Statements have been
prepared from the Books and Records and fairly and accurately present the
financial condition and the results of operations, income, expenses, assets,
Liabilities (including all reserves), changes in shareholders' equity and cash
flow of the Business and the Seller's Continuing Business, respectively.
4.7 Purchased Assets. Excluding the Leased Real Property, Seller has
and will transfer good and marketable title to the Purchased Assets and upon the
consummation of the transactions contemplated hereby and by the Seller
Documents, Buyer will acquire good and marketable title to all of the Purchased
Assets, free and clear of all Encumbrances other than Permitted Encumbrances.
The Purchased Assets include, without limitation, all assets, tangible or
intangible, of any nature whatsoever, necessary for the conduct of the Business
and are sufficient for the continued conduct of the Business after the Closing
in substantially the same manner as conducted prior to the Closing as well as
the continued distribution, exploitation, development and modification of the
Intellectual Property that comprises part of the Purchased Assets. The Purchased
Assets constitute, and on the Closing Date will constitute, all of the operating
assets or property necessary for the operation of the Business as it is
currently conducted, except for the Excluded Assets. Schedule 4.7 contains
accurate lists of all Purchased Assets comprised of Tangible Personal Property
where the value of an individual item exceeds One Thousand Dollars ($1,000) and
all descriptive information contained in Schedule 4.7 is accurate. All Tangible
Personal Property that is part of the Purchased Assets is in good operating
condition and repair and is usable in the Ordinary Course of Business.
4.8 Liabilities. Other than the Excluded Liabilities, and except as
set forth in Schedule 4.8, neither Seller nor any of its Subsidiaries has any
Liabilities relating to the Purchased Assets or the Business due or to become
due except (a) Liabilities relating to the Purchased Assets or the Business that
are reflected in the Interim Balance Sheet which have not been paid or
discharged since the Interim Balance Sheet Date, or otherwise specifically
disclosed in the Disclosure Schedule, and (b) Liabilities relating to the
Purchased Assets or the Business incurred in the Ordinary Course of Business
since the Interim Balance Sheet Date (none of which relates to any Default under
any Contract or Lease, breach of warranty, tort, infringement or violation of
any Law or Order or arose out of any Legal Proceeding) and none of which would
have a Material Adverse Effect.
4.9 Absence of Certain Changes or Events. Except as set forth on
Schedule 4.9, since the Interim Balance Sheet Date, Seller and its Subsidiaries
have conducted the Business in the Ordinary Course of Business and there has not
been any:
(a) Material Adverse Change and no event has occurred and no
circumstance exists that may result in a Material Adverse Change other than
Material Adverse Changes resulting from historical seasonality of the Business;
(b)(i) purchase, redemption, retirement or other acquisition by Seller
of any shares of any such capital stock; or (ii) declaration or payment of any
dividend or other distribution or payment in respect of such shares of capital
stock;
30
(c) amendment to the Charter or Bylaws of Seller;
(d) payment or increase by Seller of any bonuses, salaries or other
compensation (including management or other similar fees) or entry into any
employment, severance or similar Contract with any employee engaged in the
Business and which Buyer desires to hire after Closing, other than increases in
salary to employees made in the Ordinary Course of Business;
(e) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, severance or other employee benefit plan for or with any of the
employees of Seller engaged in the Business or any increase in the payment to or
benefits under any Employee Plan or other benefit obligation for or with any
employees of Seller engaged in the Business, other than increases provided under
such Employee Plan or other benefit obligation to all employees of Seller and
made in the Ordinary Course of Business;
(f) adverse change in employee relations which has or is reasonably
likely to have a Material Adverse Effect;
(g) damage to or destruction or loss of any of the Purchased Assets or
to any other asset or property of Seller relating to the Business, whether or
not covered by insurance, that could reasonably be expected to constitute a
Material Adverse Effect on the Business;
(h) (i) entry into, termination or acceleration of, or receipt of
notice of termination by Seller or any of its Subsidiaries of (1) any material
license, distributorship, dealer, sales representative, joint venture, credit or
similar agreement relating to the Business or (2) other than Assumed Liabilities
set forth on Schedule 2.2, any Contract or transaction involving a Liability by
or to Seller for which Buyer may be liable after the Closing or (ii) entry into,
termination or acceleration of, or receipt of notice of termination by Seller of
any Contract or transaction involving a Liability by or to Seller in an amount
of at least Ten Thousand Dollars ($10,000) (individually or in the aggregate)
which will remain unpaid at Closing;
(i) sale (other than sales of inventory in the Ordinary Course of
Business), lease or other disposition of any of the Purchased Assets or of any
other asset or property of Seller or any of its Subsidiaries relating to the
Business;
(j) mortgage, pledge or imposition of any Encumbrance on any Purchased
Asset, including the sale, lease or other disposition of any of its Intellectual
Property relating to the Business;
(k) (i) delay or failure to repay when due any obligation of Seller,
other than such items as have been specifically documented to Buyer in writing
or (ii) delay or failure to repay when due any obligation of Seller which delay
or failure could have a Material Adverse Affect on Seller, the Business or the
Purchased Assets, in each case, including without limitation, accounts payable
and accrued expenses, except to the extent such obligation is being disputed in
good faith by Seller;
31
(l) accrual of any expenses of Seller relating to the Business, except
for such accruals in the Ordinary Course of Business;
(m) capital expenditures by Seller relating to the Business in excess
of Five Thousand Dollars ($5,000) individually or Ten Thousand Dollars ($10,000)
in the aggregate;
(n) cancellation or waiver by Seller of any claims or rights with a
value to Seller relating to the Business or the Purchased Assets in excess of
Five Thousand Dollars ($5,000) individually or in the aggregate;
(o) payment, discharge or satisfaction of any Liability (i) by Seller
or (ii) in connection with the Business, by any of its Subsidiaries, in each
case other than the payment, discharge or satisfaction of Liabilities in the
Ordinary Course of Business;
(p) incurrence of or increase in, any Liability (i) of Seller or (ii)
in connection with the Business, of any of its Subsidiaries, in each case,
except in the Ordinary Course of Business, or any accelerated or deferred
payment of or failure to pay when due, any Liability;
(q) loan to, or any agreement with, any Business-related employee or
independent contractor of Seller or any of its Subsidiaries other than an
employment agreement;
(r) failure by Seller to use reasonable efforts to preserve intact the
current business organization of Seller and its Subsidiaries relating to the
Business, and maintain the relations and goodwill with its suppliers, customers,
landlords, creditors, employees, licensors, resellers, distributors, agents and
others having business relationships with them relating to the Business;
(s) licensing out on an exclusive basis or other than in the Ordinary
Course of Business, disposition or lapsing of any Intellectual Property or any
disclosure to any Person of any trade secret or other confidential information;
(t) change in the accounting methods, principles or practices used by
Seller or, to the extent they engage in or affect the Business, any of its
Subsidiaries;
(u) revaluation by Seller of any of the Purchased Assets, including,
without limitation, writing down the value of Inventory or writing off notes or
accounts receivable;
(v) action taken by Seller to accelerate the collection of any
receivable or which changes credit terms to customers;
(w) payment to any Affiliate (or any Affiliate or Family Member
thereof) of Seller or any of its Subsidiaries, other than payments made to such
Persons in the Ordinary Course of Business for actual obligations owed, products
purchased or services rendered, in each case, in amounts not in excess of the
fair value thereof;
(x) election made, extension granted or waiver of a statute of
limitations with respect to Taxes of Seller or any of its Subsidiaries or
settlement or compromise any federal, state, local or foreign claim or Liability
for Taxes of Seller or any of its Subsidiaries;
32
(y) price protection, discount, rebate, incentive, price reduction,
free or discounted upgrade offer, free or discounted bundling offer or other
similar programs affecting any of the Purchased Assets, other than a limited
number of free copies of Seller's software products provided directly by Seller
on a case-by-case basis, which limited number of free copies could not be
expected to have a Material Adverse Effect;
(z) existence of any other event or condition which in any one case or
in the aggregate has or might reasonably be expected to have a Material Adverse
Effect on the Business; or
(aa) agreement, whether oral or written, by Seller with respect to or
to do any of the foregoing other than as expressly provided for herein.
4.10 Taxes.
(a) Filing of Tax Returns. Except as set forth on Schedule 4.10(a),
Seller and its Subsidiaries have duly and timely filed (or caused to be filed)
with the appropriate taxing authorities all Tax Returns required to be filed
through the Closing Date. Except as set forth on Schedule 4.10(a), all such Tax
Returns filed are complete and accurate in all respects. Except as set forth on
Schedule 4.10(a), neither Seller nor any of its Subsidiaries is currently the
beneficiary of any extension of time within which to file any Tax Return. No
claim has ever been made against Seller, any of its Subsidiaries or their
respective assets by an authority in a jurisdiction where Seller or any of its
Subsidiaries does not file Tax Returns such that Seller or any of its
Subsidiaries is or may be subject to taxation by that jurisdiction.
(b) Payment of Taxes. All Taxes owed and due by Seller or any of its
Subsidiaries (whether or not shown on any Tax Return) have been paid. The unpaid
Taxes of Seller or any of its Subsidiaries, if any, (i) did not, as of the date
of its Interim Balance Sheet, exceed the reserve for Tax liability (excluding
any reserve for deferred Taxes established to reflect timing differences between
book and Tax income) set forth on the face of its Interim Balance Sheet (rather
than in any notes thereto), and (ii) have not exceeded that reserve as adjusted
for operations and transactions through the Closing Date in accordance with the
past custom and practice of Seller and its Subsidiaries in filing their Tax
Returns. Except as set forth on Schedule 4.10(b), since the date of its Interim
Balance Sheet, neither Seller nor any of its Subsidiaries has (A) incurred any
Liability for Taxes other than in the Ordinary Course of Business or (B) paid
Taxes other than Taxes paid on a timely basis and in a manner consistent with
past custom and practice.
(c) Audits, Investigations, Disputes or Claims. Other than as set
forth on Schedule 4.10(c), currently, no deficiencies for Taxes are claimed,
proposed or assessed by any taxing or other governmental authority against
Seller or any of its Subsidiaries. Except as set forth on Schedule 4.10(c),
there are no pending or, to the Knowledge of Seller, threatened audits,
investigations, disputes or claims or other actions for or relating to any
Liability for Taxes with respect to Seller or any of its Subsidiaries, and there
are no matters under discussion by or on behalf of Seller or any of its
Subsidiaries with any Governmental Body, or known to Seller or any of its
Subsidiaries, with respect to Taxes that are likely to result in an additional
Liability for Taxes with respect to Seller or any of its Subsidiaries. Audits of
federal, state and local Tax
33
Returns by the relevant taxing authorities have been completed for the periods
set forth in Schedule 4.10(c) and, except as set forth in Schedule 4.10(c), none
of Seller, any Subsidiary thereof, or any predecessor thereof has been notified
that any taxing authority intends to audit a Tax Return for any other period.
Seller has delivered to Purchaser complete and accurate copies of Seller's and
its Subsidiaries' federal, state and local Tax Returns for the years ended
September 30, 1999, 2000 and 2001 as well as complete and accurate copies of all
examination reports and statements of deficiencies assessed against or agreed to
by Seller or any of its Subsidiaries at any time. Neither Seller nor any of its
Subsidiaries has waived any statute of limitations in respect of Taxes or agreed
to any extension of time with respect to a Tax assessment or deficiency. Except
for Ernst & Young LLP, no power of attorney granted by Seller or any of its
Subsidiaries with respect to any Taxes is currently in force.
(d) Lien. There are no Encumbrances for Taxes (other than for current
Taxes not yet due and payable) on any of the assets of Seller or any of its
Subsidiaries or any shares of its or their capital stock.
(e) Tax Elections. All material elections with respect to Taxes
affecting Seller, any of its Subsidiaries or any of their respective assets, as
of the Closing Date are set forth in Schedule 4.10(e). Neither Seller nor any of
its Subsidiaries has: (i) consented at any time under Section 341(f)(1) of the
Code to have the provisions of Section 341(f)(2) of the Code apply to any
disposition of any of its assets; (ii) agreed, and is not required, to make any
adjustment under Section 481(a) of the Code by reason of a change in accounting
method or otherwise; (iii) made an election, and is not required, to treat any
of its assets as owned by another Person pursuant to the provisions of Section
168(f) of the Code or as tax-exempt bond financed property or tax-exempt use
property within the meaning of Section 168 of the Code; (iv) acquired, and does
not own, any assets that directly or indirectly secure any debt the interest on
which is tax exempt under Section 103(a) of the Code; (v) made a consent
dividend election under Section 565 of the Code; or (vi) made any of the
foregoing elections and is not required to apply any of the foregoing rules
under any comparable state or local Tax provision.
(f) Prior Affiliated Groups. Neither Seller nor any of its
Subsidiaries is and they have never been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code. Seller does not
have any Liability for the Taxes of any Person (other than such Company) (i)
under Treasury Regulations Section 1.1502-6 (or any similar provision of state,
local or foreign law), (ii) as a transferee or successor, (iii) by Contract, or
(iv) otherwise.
(g) Tax Sharing Agreements. There are no agreements for the sharing of
Tax liabilities or similar arrangements (including indemnity arrangements) with
respect to or involving Seller, any of its Subsidiaries or any of their
respective assets or the Business, and, after the Closing Date, neither Seller,
any of its Subsidiaries nor any of their respective assets or the Business or
the business of the Subsidiaries shall be bound by any such Tax-sharing
agreements or similar arrangements or have any Liability thereunder for amounts
due in respect of periods prior to the Closing Date.
(h) Partnerships and Single Member LLC's. Except for whatever
characterization could be made of Seller's current relationship with Sony
Pictures Entertainment, Inc., Seller and its Subsidiaries (i) are not subject to
any joint venture, partnership, or other
34
arrangement or contract which is treated as a partnership for Tax purposes, (ii)
do not own a single member limited liability company which is treated as a
disregarded entity, (iii) is not a shareholders of a "controlled foreign
corporation" as defined in Section 957 of the Code (or any similar provision of
state, local or foreign law) other than Seller's interest in International Image
Services, Inc. and (iv) not "personal holding companies" as defined in Section
542 of the Code (or any similar provision of state, local or foreign law).
(i) No Withholding. Seller has not been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code during
the applicable period specified in Section 897 of the Code. Seller has withheld
and paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
shareholder or other third party. The transactions contemplated herein are not
subject to the tax withholding provisions of Section 3406 of the Code, or of
Subchapter A of Chapter 3 of the Code or of any other provision of law.
(j) International Boycott. Neither Seller nor any Subsidiary of Seller
has participated in and is not participating in an international boycott within
the meaning of Section 999 of the Code.
(k) Permanent Establishment. Except as set forth in Schedule 4.10(k),
Seller does not have and has never had a permanent establishment in any foreign
country, as defined in any applicable Tax treaty or convention between the
United States and such foreign country.
(l) Parachute Payments. Except as set forth on Schedule 4.10(l),
Seller is not a party to any existing Contract, arrangement or plan that has
resulted or would result (upon the Closing or otherwise), separately or in the
aggregate, in the payment of any "excess parachute payments" within the meaning
of Section 280(G) of the Code.
(m) Tax Shelters. Neither Seller nor any Subsidiary has participated
in and is not participating in, any transaction described in Section 6111(c) or
(d) of the Code or Section 6112(b) of the Code or the Treasury Regulations
thereunder, or in any reportable transaction described in such regulations.
4.11 Facilities. Seller does not own any Owned Real Property or any
interest, other than a leasehold interest, in any Facility or real property.
(a) Leases or Other Agreements. Schedule 4.11(a) lists and describes
all Facilities and real property leased by Seller and all subleases. Except for
Facility Leases and subleases listed on Schedule 4.11(a), there are no leases,
subleases, licenses, occupancy agreements, options, rights, concessions or other
agreements or arrangements, written or oral, granting to any Person the right to
purchase, use or occupy any Facility, or any real property in connection with
the Business or any portion thereof or interest in any such Facility or real
property.
(b) Facility Leases and Leased Real Property. With respect to the
Facility Lease, Seller has and will transfer to Buyer at the Closing an
unencumbered interest in the Leasehold Estate, subject to any subleases
specified in Schedule 4.11(b). Seller enjoys peaceful and undisturbed possession
of all the Leased Real Property.
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(c) Certificate of Occupancy. All Facilities have received all
required approvals of Governmental Bodies (including, without limitation,
Permits and a certificate of occupancy or other similar certificate permitting
lawful occupancy of the Facilities) required in connection with the operation
thereof and have been operated and maintained in all respects in accordance with
applicable Laws except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect.
(d) Utilities. All Facilities are supplied with utilities (including
without limitation water, sewage, disposal, electricity, gas and telephone) and
other services necessary for the operation of such Facilities as currently
operated, and there is no condition which would reasonably be expected to result
in the termination of the present access from any Facility to such utility
services.
(e) Improvements, Fixtures and Equipment. The improvements constructed
on the Facilities, including, without limitation, all Leasehold Improvements and
Tangible Personal Property owned, leased or used by Seller at the Facilities are
(i) insured to the extent and in a manner customary in the industry, (ii)
structurally sound with no known material defects, (iii) in good operating
condition and repair, subject to ordinary wear and tear, (iv) not in need of
maintenance, repair or correction except for ordinary routine maintenance and
repair, the cost of which would not be material, (v) sufficient for the
operation of the Business as presently conducted and (vi) to Seller's Knowledge,
in conformity, in all respects, with all applicable Laws.
(f) No Special Assessment. Seller has not received notice of any
special assessment relating to any Facility or any portion thereof and there is
no pending or threatened special assessment.
4.12 Intellectual Property; Software.
(a) Schedule 4.12(a) hereto sets forth a true, correct and complete
list of all Intellectual Property of Seller and any licenses and agreements
relating to such Intellectual Property (other than trade secrets, know-how and
goodwill attendant to such Intellectual Property and other intellectual property
rights not reducible to schedule form) owned, licensed to or used by Seller with
respect to the conduct of the Business as presently conducted or presently
proposed (but for the consummation of the transactions contemplated hereby) to
be conducted. Schedule 4.12(a) separately identifies the Intellectual Property
owned by Seller and the Intellectual Property licensed to or used by Seller.
(b) Except as set forth on Schedule 4.12(b), neither Seller nor any
Subsidiary thereof has interfered with, infringed upon or misappropriated any
Intellectual Property rights of any third party, and neither Seller nor any
Subsidiary thereof (and employees with direct responsibility for Intellectual
Property matters) has received any charge, complaint, claim, demand, or notice
alleging any such interference, infringement, misappropriation, or violation
(including any claim that Seller must license or refrain from using any
Intellectual Property rights of any third party). To Seller's Knowledge, no
third party has interfered with, infringed upon or misappropriated any
Intellectual Property rights of Seller, other than such non-commercial,
case-by-case infringements as are typically encountered in the software industry
in
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the United States, including without limitation, "cracked" serial numbers,
online auctions and other similar pirate-based activities. No third party has
interfered with, infringed upon or misappropriated any Intellectual Property
rights of Seller which interference, infringement or misappropriation,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on the Business.
(c) Except as set forth on Schedule 4.12(c), (A) Seller owns all
right, title and interest in, or has a valid and binding license to use, the
Intellectual Property set forth on Schedule 4.12(a), and, to the extent required
in connection with the way in which Seller has conducted, conducts, or presently
proposes to conduct the Business, to make, have made, use, sell, import and
export, distribute, publicly perform, publicly display, reproduce and prepare
derivative works of such Intellectual Property; (B) the rights of Seller to such
Intellectual Property are free and clear of all Encumbrances except Permitted
Encumbrances, if any; (C) all registrations with and applications to
governmental or regulatory bodies in respect of such Intellectual Property are
valid and in full force and effect and Seller has taken all action required to
maintain their validity and effectiveness; (D) there are no restrictions (other
than as set forth in the Assumed Contracts for certain third party technologies
as described in Schedule 4.12(c)) on the direct or indirect (i) transfer of any
license, or any interest therein, held by Seller in respect of such Intellectual
Property or (ii) direct or indirect changes of control of Seller; (E) Seller has
made available to Buyer prior to the execution of the Original Agreement (and
shall deliver at the Closing) documentation with respect to any invention,
process, design, computer program or other know-how or trade secret included in
such Intellectual Property, which documentation is, to Seller's Knowledge,
accurate in all material respects and reasonably sufficient in detail and
content to identify and explain such invention, process, design, computer
program or other know-how or trade secret and to facilitate its use without
reliance on the special knowledge or memory of any person; (F) Seller has taken
reasonable measures to protect the secrecy, confidentiality and value of its
trade secrets; and (G) Seller has not, nor has it received any notice that they
are, in Default (or with the giving of notice or lapse of time or both, would be
in Default) under any license with respect to such Intellectual Property.
(d) Except as identified on Schedule 4.12(d), no approval or consent
of any person is needed so that the interest of Buyer in such Intellectual
Property shall continue to be in full force and effect following the
transactions contemplated by this Agreement, and Seller is not subject to any
restriction, agreement, instrument, order, judgment or decree which would be
violated or breached by the consummation of the transactions contemplated by
this Agreement.
(e) Except for the fees identified in Schedule 4.12(e) for the
agreements identified therein, no licensing fees, royalties, profit
participations, or other payments are due or payable by Seller in connection
with such Intellectual Property, other than maintenance fees.
(f) Schedule 4.12(f) separately lists and identifies all (A) computer
programs, (B) computer databases (including, but not limited to, databases used
in conjunction with such computer programs) and (C) documentation,
specifications, manuals and materials associated therewith (other than
documentation, specifications, manuals and materials related solely to
Non-Product Software Rights (as hereinafter defined)), in each case, owned,
licensed or used by Seller, including, without limitation, Visual C, Visual C++,
Visual Studio-net, Visual Basic and similar creative software tools and other
than software commonly known as "bug tracking,"
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source code control and website design and design/tracking software, but
excluding generally available and unmodified off-the-shelf microcomputer and
work station software that is not described above in this Section 4.12(f)
(collectively, the "Software Rights"). Schedule 4.12(f) further specifies (i)
which Software Rights comprise (separately or together with other Intellectual
Property or other items) products that are, have been or are anticipated to be
(but for the consummation of the transactions contemplated hereby), sold,
licensed or otherwise distributed by Seller in connection with the Business or
are components of any such products ("Product-Related Software Rights") and (ii)
which Software Rights do not (and have not in the past), and are not anticipated
to (but for the consummation of the transactions contemplated hereby), comprise
or be included in any products that are sold, licensed or otherwise distributed
by Seller in connection with the Business ("Non-Product Software Rights").
Except as set forth in Schedule 4.12(f), all right, title and interest in and to
the Software (as hereinafter defined) is owned by Seller free and clear of all
Encumbrances, are fully transferable to Buyer, and no party other than Seller
has any interest in the Software. Each of the representations in Sections
4.12(b), above, is applicable to the Software Rights.
(g) For purposes of this Agreement, the computer software included in
the Product-Related Software Rights is the "Product-Related Software," the
computer software included in the Non-Product Software Rights is the
"Non-Product Software" and the Product-Related Software and Non-Product Software
are, collectively, the "Software." The Non-Product Software performs
substantially in accordance with the documentation and other written materials
related to the Non-Product Software and is free from substantial defects in
programming and operations, is in machine readable form, and includes all
computer programs, materials, tapes, know-how, object and source codes, other
written materials, know-how and processes related to the Non-Product Software.
The Product-Related Software performs in accordance with the documentation and
other written materials related to the Product-Related Software and is free from
defects in programming and operations, is in machine readable form, contains all
current revisions of such Product-Related Software and includes all computer
programs, materials, tapes, know-how, object and source codes, other written
materials, know-how and processes related to the Product-Related Software.
Seller has delivered to Buyer complete and correct copies of (i) the
Product-Related Software in its current form and all user and technical
documentation related thereto and (ii) all Software other than Product-Related
Software in its current form and all user and technical documentation related
thereto in Seller's possession.
(h) All copies of the Software embodied in physical form are being
delivered to Buyer at or prior to the Closing.
(i) Seller and its Subsidiaries have kept secret and have not
disclosed the source code for the Software to any Person other than certain
employees of Seller or such Subsidiary who are subject to the terms of a binding
confidentiality agreement with respect thereto. Seller or such Subsidiary have
taken all appropriate measures to protect the confidentiality and proprietary
nature of the Software, including, without limitation, the use of the
confidentiality agreements with all of their respective employees having access
to the Software source and object code.
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(j) No employee of Seller or any Subsidiary is in default under, and
the consummation of the transactions contemplated by this Agreement will not
result in a default of, any term of any employment contract, agreement or
arrangement relating to the Software or any non-competition arrangement, or any
other agreement or any restrictive covenant relating to the Software or its
development or exploitation. Other than third party royalties as specifically
disclosed herein, Seller has no obligation to compensate any Person for the
development, use, sale or exploitation of the Software nor except as disclosed
in Schedule 4.12, has Seller or any of its Subsidiaries granted to any other
person or entity any license, option or other rights to develop, use, sell or
exploit in any manner the Software whether requiring the payment of royalties or
not.
(k) All Intellectual Property owned by Seller and for which
confidentiality is appropriate has been maintained in confidence in accordance
with protection procedures that are reasonably adequate for the protection of,
and are customarily used in the industry, to protect rights of like importance.
All former and current managers, employees, agents, consultants and independent
contractors who have authored, co-authored or otherwise contributed to or
participated in any material way in the conception and development of
Intellectual Property which is used in and material to the Business ("IP
Participant"), have executed and delivered to Seller a proprietary information
agreement, pursuant to which, inter alia, such IP Participant has assigned any
and all of his rights in such Intellectual Property to Seller and has agreed to
keep such Intellectual Property confidential and not to use such Intellectual
Property for any purpose unrelated to his work for Seller. No former or current
IP Participant has filed, asserted in writing or, to the Knowledge of Seller (or
employees of Seller with direct responsibility for Intellectual Property
matters), threatened any claim against Seller in connection with his involvement
in Intellectual Property which is used in the Business. To the Knowledge of
Seller (and employees of Seller with direct responsibility for Intellectual
Property matters), no IP Participant has any patents issued or applications
pending for any device, process, design or invention of any kind now used or
needed by Seller which patents or applications have not been assigned to Seller.
(l) Except as set forth in Schedule 4.12(l), no former or current
shareholders, director or officer, employee or independent contractor of Seller
or any of its Subsidiaries has any right to receive royalty payments or license
fees from Seller or such Subsidiary.
(m) With respect to privacy policies, security agreements and other
similar items related to the Business and/or the Purchased Assets (including,
without limitation, those related to the Websites) (the "Commitments"), (A)
Seller and its Subsidiaries are in full compliance with all applicable
Commitments, except where non-compliance could not reasonably be expected to
have a Material Adverse Effect; (B) the transactions contemplated by this
Agreement and the Ancillary Agreements will not violate any Commitments; (C)
neither Seller nor any of its Subsidiaries have received inquiries from the
Federal Trade Commission or any other Governmental Body regarding Commitments;
(D) neither Seller nor, to Seller's Knowledge, any of its Subsidiaries have
received any written (including email) complaints from any web site user
regarding Commitments, or compliance with Commitments; (E) the Commitments have
not been rejected by any applicable certification organization which has
reviewed such Commitment or to which any such Commitment has been submitted and
(F), neither Seller nor any of its Subsidiaries have experienced the
cancellation, termination or revocation of any privacy or security certification
issued by any Commitments.
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(n) Seller has in its possession or control: (A) correct and complete,
fully-executed copies of all of the licenses and agreements (as amended to date)
that are required to be identified on Schedule 4.12(a); and (B) correct and
complete copies of all documents (including, without limitation patents,
registration certificates, renewal certificates, applications, prosecution
histories, and all material documents submitted to or received from the relevant
patent, copyright, trademark, domain name or other authorities in the United
States and foreign jurisdictions, as the case may be) relating to each item of
the Intellectual Property identified on Schedule 4.12(a). Seller has delivered
to Buyer correct and complete, fully-executed copies of (i) all of the documents
described in clause (A) of this subsection and (ii) all of the documents
described in clause (B) of this subsection that are in Seller's possession;
provided that to Seller's Knowledge there are no documents described in clause
(B) of this Subsection that are not in Seller's possession.
(o) Seller has (i) collected the Customer/User Data in accordance with
protection procedures which are reasonably adequate for protection customarily
used in the industry to protect rights of like importance, except where the
failure to do so could not reasonably be expected to have a Material Adverse
Effect, and (ii) maintained the Customer/User Data in confidence in accordance
with protection procedures which are reasonably adequate for protection
customarily used in the industry to protect rights of like importance, except
where the failure to do so could not reasonably be expected to have a Material
Adverse Effect. Seller shall provide Buyer will all such Customer/User Data in a
format reasonably requested, and useable, by Buyer.
4.13 Contracts; No Defaults.
(a) Schedule 4.13(a) contains a complete and accurate list, and Seller
has made available to Buyer true and complete copies, of all Seller Contracts of
the following categories:
(i) Contracts that involve performance of services or delivery of
goods by Seller during any twelve (12) month period of an amount or value,
individually or, for a series of related Contracts, in the aggregate, in
excess of Five Thousand Dollars ($5,000);
(ii) Contracts that involve performance of services or delivery
of goods or materials to Seller during any twelve (12) month period of an
amount or value, individually or, for a series of related Contracts, in the
aggregate, in excess of Five Thousand Dollars ($5,000);
(iii) Contracts that were not entered into in the Ordinary Course
of Business;
(iv) Facility Leases and Leases of Tangible Personal Property of
Seller and other Contracts, in each case, affecting the ownership of,
leasing of, title to, use of, or any leasehold or other interest in, any
real or personal property (except personal property leases and installment
and conditional sales agreements having a value per item or
40
aggregate payments, in each case, of less than Five Thousand Dollars
($5,000) and with terms of less than one year);
(v) Licensing agreements of Seller and each of its Subsidiaries
and other Contracts, in each case, with respect to patents, trademarks,
copyrights or other Intellectual Property as well as the forms of all
agreements with current or former employees, consultants or contractors
regarding the appropriation of, or the non-disclosure of, any of the
Intellectual Property set forth on Schedule 4.12(a);
(vi) collective bargaining agreements of Seller and other
Contracts, in each case, to or with any labor union or other employee
representative of a group of employees and each other written employment or
consulting agreement with any employees or consultants;
(vii) joint ventures or partnerships (however named) of Seller
and other Contracts, in each case, involving a sharing of profits, losses,
costs or liabilities by Seller with any other Person;
(viii) Contracts containing covenants that in any way purport to
restrict the business activity of Seller or limit the freedom of Seller to
engage in any line of business or to compete with any Person or that
subject Seller to confidentiality or non-disclosure obligations;
(ix) Contracts providing for payments to or by any Person based
on sales, purchases or profits, other than direct payments for goods;
(x) powers of attorney granted by or to Seller that are currently
effective and outstanding;
(xi) Contracts entered into other than in the Ordinary Course of
Business that contain or provide for an express undertaking by Seller to be
responsible for consequential damages;
(xii) Contracts for capital expenditures relating to the Business
in excess of Five Thousand Dollars ($5,000) individually or Ten Thousand
Dollars ($10,000) in the aggregate;
(xiii) Contracts which, to the Knowledge of Seller, will result
in a material loss to Seller;
(xiv) Contracts between Seller and any of its former or current
stockholders or shareholders, directors, officers and employees (other than
standard employment agreements previously furnished to or approved by Buyer
and other than option and warrant agreements with Seller's officers,
directors and employees);
(xv) written warranties, guaranties, and or other similar
undertakings with respect to contractual performance extended by Seller,
other than in the Ordinary Course of Business; and
41
(xvi) each amendment, supplement, and modification (whether oral
or written) in respect of any of the foregoing.
With respect to any of the foregoing Contracts, Schedule 4.13(a) sets
forth reasonably complete details concerning such Contracts, including the
general type of Contract, the parties thereto and the termination date, if any.
All Contracts which are not in writing and/or which have not been delivered to
Buyer (i) may be terminated by Seller at any time upon giving notice to the
other party to such Contracts and without any payment by, penalty against, or
Liability of Seller and (ii) do not contain any minimum or maximum volume,
minimum payment, exclusivity, product update, or other similar obligations or
provisions that bind Seller.
(b) Except as set forth in Schedule 4.13(b), to the Knowledge of
Seller, no officer, director, agent, employee, consultant or contractor of
Seller is bound by any Contract that purports to limit the ability of such
officer, director, agent, employee, consultant or contractor to (i) engage in or
continue any conduct, activity or practice relating to the Business or (ii)
assign to Seller or to any other Person any rights to any invention, improvement
or discovery.
(c) Except as set forth in Schedule 4.13(c), each Contract set forth
on Schedule 4.13(a) is in full force and effect and is valid and enforceable in
accordance with its terms, except as such enforceability may be limited by (i)
bankruptcy, insolvency, moratorium, reorganization or other similar laws
affecting creditors' rights generally and (ii) the general principles of equity,
regardless of whether asserted in a proceeding in equity or at law.
(d) Except as set forth in Schedule 4.13(d):
(i) Seller is, and at all times has been, in compliance with all
material terms and requirements of each Contract set forth on Schedule
4.13(a) under which Seller has or had any obligation or Liability or by
which Seller or any of the assets owned or used by Seller is or was bound;
(ii) to the Knowledge of Seller, each other Person that has or
had any obligation or Liability under any Contract set forth on Schedule
4.13(a) under which Seller has or had any rights is, and has been, in
compliance with all material terms and requirements of such Contract;
(iii) to the Knowledge of Seller, no event has occurred or
circumstance exists that (with or without notice or lapse of time) may
contravene, conflict with, or result in a violation or breach of, or give
Seller or any other Person the right to declare a default or exercise any
remedy under, or to accelerate the maturity or performance of, or to
cancel, terminate or modify, any Contract set forth on Schedule 4.13(a);
and
(iv) Seller has not given to or received from any other Person,
any written or, to the Knowledge of Seller, other notice or other
communication regarding any actual, alleged, possible or potential
violation or breach of, or default under, any Contract set forth on
Schedule 4.13(a).
(e) Other than as set forth in the Settlement Agreements, there are no
renegotiations of, attempts to renegotiate, or outstanding rights to renegotiate
any material
42
amounts paid or payable to Seller under current or completed Contracts, as
applicable, with any Person and no such Person has made written demand for such
renegotiation.
(f) Contracts relating to the provision of products or services by
Seller have been entered into in the Ordinary Course of Business and have been
entered into without the commission of any act alone or in concert with any
other Person, or any consideration having been paid or promised, that is or
would be in violation of any Laws.
(g) Seller has no reason to believe that the products and services
called for by any unfinished Seller Contract cannot be supplied in accordance
with the terms of such Contract, including time specifications, and has no
reason to believe that any unfinished Contract will upon performance by Seller
result in a loss to Seller.
(h) All of the Seller Contracts set forth on Schedule 4.13(a) are
assignable to Buyer without the consent of any other Person, except as
specifically noted in such Schedule 4.13(a).
4.14 Employee Benefits.
(a) Schedule 4.14 contains a complete list of all Employee Plans (i)
covering employees, directors or consultants or former employees, directors or
consultants in, or related to, the Business and/or (ii) with respect to which
Buyer may incur any Liability ("Business Employee Plans"). Seller has delivered
or made available to Buyer true and complete copies of all Employee Plans,
including written interpretations thereof and written descriptions thereof which
have been distributed to Seller's employees and for which Seller has copies, all
annuity contracts or other funding instruments relating thereto, and a complete
description of all Employee Plans which are not in writing.
(b) Neither Seller nor any ERISA Affiliate sponsors, maintains,
contributes to or has an obligation to contribute to, or has sponsored,
maintained, contributed to or had an obligation to contribute to, any Pension
Plan subject to Title IV of ERISA, any Multiemployer Plan or any Registered
Pension Plan in Canada.
(c) Each Welfare Plan which covers or has covered employees or former
employees of Seller or of its Affiliates in the Business and which is a "group
health plan," as defined in Section 607(1) of ERISA, has been operated in
compliance with provisions of Part 6 of Title I, Subtitle B of ERISA and Section
4980B of the Code at all times.
(d) There is no Legal Proceeding or Order outstanding, relating to or
seeking benefits under any Business Employee Plan that is pending, threatened or
anticipated against Seller, any ERISA Affiliate or any Employee Plan.
(e) Neither Seller nor any ERISA Affiliate has any liability for
unpaid contributions under Section 515 of ERISA with respect to any Welfare Plan
(i) covering employees, directors or consultants or former employees, directors
or consultants in, or related to, the Business and (ii) with respect to which
Buyer may incur any Liability.
43
(f) There are no liens arising under the Code or ERISA with respect to
the operation, termination, restoration or funding of any Business Employee Plan
or arising in connection with any excise tax or penalty tax with respect to any
Business Employee Plan.
(g) Each Business Employee Plan has at all times been maintained in
all material respects, by its terms and in operation, in accordance with all
applicable laws, including, without limitation, ERISA and the Code.
(h) Seller and its ERISA Affiliates have made full and timely payment
of all amounts required to be contributed under the terms of each Business
Employee Plan and applicable Law or required to be paid as expenses or as Taxes
under applicable Laws, under such Employee Plan, and Seller and its ERISA
Affiliates shall continue to do so through the Closing Date.
(i) Each Business Employee Plan intended to qualify under Section 401
of the Code has received a current and valid determination letter from the
Internal Revenue Service that it does so qualify, and to the Knowledge of
Seller, no event has occurred and no condition exists that could reasonably be
expected to result in the revocation of such determination letter or the loss of
such qualification or exemption.
(j) Except as set forth on Schedule 4.14(j), neither the execution and
delivery of this Agreement or other related agreements by Seller nor the
consummation of the transactions contemplated hereby or thereby will result in
the acceleration or creation of any rights of any person to benefits under any
Employee Plan (including, without limitation, the acceleration of the vesting or
exercisability of any stock options, the acceleration of the vesting of any
restricted stock, the acceleration of the accrual or vesting of any benefits
under any Pension Plan or the acceleration or creation of any rights under any
severance, parachute or change in control agreement).
(k) Neither Seller nor any ERISA Affiliate has any announced plan or
legally binding commitment to create any additional Business Employee Plan or to
amend or modify any existing Business Employee Plan.
(l) Neither Seller nor any ERISA Affiliate has incurred any liability
with respect to any Employee Plan which may create or result in any liability to
Buyer.
4.15 Labor Matters; Employees.
(a) General. Neither Seller nor any of its Subsidiaries is a party to
any collective bargaining or other labor Contract. There has not been, there is
not presently pending or existing, and, to the Knowledge of Seller, there is not
threatened (i) any strike, slowdown, picketing, work stoppage or employee
grievance process against Seller or any of its Subsidiaries or the Business;
(ii) any Legal Proceeding against or affecting Seller or any of its Subsidiaries
or the Business relating to the alleged violation of any Law or Order pertaining
to labor relations or employment matters, including any charge or complaint
filed by an employee or union with the National Labor Relations Board, the Equal
Employment Opportunity Commission, the Ontario Labour Relations Board, the
Ontario Human Rights Commission, the Pay Equity Hearings Tribunal or any
comparable Governmental Body, organizational activity, or other labor or
44
employment dispute against or affecting the Business or Seller or any of its
Subsidiaries; or (iii) union organizing campaign or any application for
certification of a collective bargaining agent. No event has occurred or
circumstance exists that could provide the basis for any work stoppage or other
labor dispute. There is no lockout of any employees by Seller or any of its
Subsidiaries, and no such action is contemplated by Seller or any of its
Subsidiaries. Seller and each of its Subsidiaries have complied with all
material Laws relating to employment, equal employment opportunity,
nondiscrimination, harassment, retaliation, immigration, wages, hours, benefits,
collective bargaining, the payment of social security and similar Taxes,
occupational health and safety, and plant closing. Neither Seller nor any of its
Subsidiaries is liable for the payment of any compensation, damages, Taxes,
fines, penalties or other amounts (including, without limitation, amounts
related to workplace safety and insurance), however designated, for failure to
comply with any of the foregoing Laws.
(b) WARN Act. Except as set forth in Schedule 4.15, since the
enactment of the WARN Act, Seller has not effectuated (i) a "plant closing" (as
defined in the WARN Act) affecting any site of employment or one or more
facilities or operating units within any site of employment or facility of
Seller or any of its Subsidiaries, or (ii) a "mass layoff" (as defined in the
WARN Act) or group layoff as regulated under the Employment Standards Act of
Ontario affecting any site of employment or facility of Seller, nor has Seller
been affected by any transaction or engaged in layoffs or employment
terminations sufficient in number to trigger application of any similar state,
provincial or local law. No "plant closing" (as defined in the WARN Act) or
"mass layoff" (as defined in the WARN Act) or group layoff as regulated under
the Employment Standards Act of Ontario set forth in Schedule 4.15 failed to
comply with the requirements of the WARN Act or the Employment Standards Act of
Ontario applicable thereto.
4.16 Legal Proceedings. Except as set forth on Schedule 4.16, there is
no Legal Proceeding or Order (a) pending or, to the Knowledge of Seller,
threatened or anticipated against or affecting Seller, the Business or the
Purchased Assets (or to the Knowledge of Seller, pending or threatened, against
any of the officers, directors or employees of Seller with respect to their
business activities related to or affecting the Business); (b) that challenges
or that may have the effect of preventing, making illegal, delaying or otherwise
interfering with any of the transactions contemplated by this Agreement; or (c)
related to the Business or the Purchased Assets to which Seller is otherwise a
party. To the Knowledge of Seller, there is no reasonable basis for any such
Legal Proceeding or Order. Except as set forth on Schedule 4.16, to the
Knowledge of Seller, no officer, director, agent or employee of Seller is
subject to any Order that prohibits such officer, director, agent or employee
from engaging in or continuing any conduct, activity, or practice relating to
the Business. Except as set forth on Schedule 4.16, neither Seller nor the
Business or the Purchased Assets is subject to any Order of any Governmental
Body and Seller is not engaged in any Legal Proceeding to recover monies due it
or for damages sustained by it. Seller is not and has not been in Default with
respect to any Order, and there are no unsatisfied judgments against Seller or
the Business or the Purchased Assets. There is not a reasonable likelihood of an
adverse determination of any pending Legal Proceedings. There are no Orders or
agreements with, or Encumbrances by, any Governmental Body or quasi-governmental
entity relating to any Environmental Law which regulate, obligate, bind or in
any way affect Seller or any Facility or Former Facility.
4.17 Compliance with Law.
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(a) Except as set forth on Schedule 4.17, Seller, to its Knowledge,
and the conduct of the Business are and at all times have been in compliance
with all Laws or Orders applicable to them or to the conduct and operations of
the Business or relating to or affecting the Purchased Assets. Seller has not
received any notice to the effect that, or otherwise been advised of (i) any
actual, alleged, possible or potential violation of, or failure to comply with,
any such Laws or Orders or (ii) any actual, alleged, possible or potential
obligation on the part of Seller to undertake, or to bear all or any portion of
the cost of, any remedial action of any nature. No event has occurred or
circumstance exists that (with or without notice or lapse of time) (i) may
constitute or result in a violation by Seller of, or a failure on the part of
Seller, any such Laws or Orders or (ii) may give rise to any obligation on the
part of Seller to undertake, or to bear all or any portion of the cost of, any
remedial action of any nature, except, in either case separately or the cases
together, where such violation or failure to comply could not reasonably be
expected to have a Material Adverse Effect.
(b) None of Seller, or any of its directors, officers or
Representatives or to the Knowledge of Seller, any employee or other Person
affiliated with or acting for or on behalf of Seller, has, directly or
indirectly, (i) made any contribution, bribe, rebate, payoff, influence payment,
kickback or other payment to any Person, private or public, regardless of form,
whether in money, property or services (A) to obtain favorable treatment in
securing business, (B) to pay for favorable treatment for business secured, (C)
to obtain special concessions or for special concessions already obtained, for
or in respect of Seller or any of its Affiliates or (D) in violation of any Laws
of the United States (including, without limitation, the Foreign Corrupt
Practices Act of 1977, as amended (15 U.S.C. Sections 78dd-1 et seq.)) or any
laws of any other country having jurisdiction; or (ii) established or maintained
any fund or asset that has not been recorded in the Books and Records of Seller.
4.18 Permits. Schedule 4.18 sets forth a complete list of all Permits
held by Seller or used in the conduct of the Business or which relate to the
Purchased Assets. The Permits set forth on Schedule 4.18 collectively constitute
all of the Permits necessary for Seller to lawfully conduct and operate the
Business, as applicable, as they are presently conducted and to permit Seller to
own and use the Purchased Assets to own and use its assets, in each case, in the
manner in which they are presently owned and used. Except as set forth on
Schedule 4.18, Seller are and at all times have been in compliance with all
material Permits applicable to it or to the conduct and operations of the
Business or relating to or affecting the Purchased Assets. Seller has not
received any notice to the effect that, or otherwise been advised of (i) any
actual, alleged, possible or potential violation of, or failure to comply with,
any such Permits or (ii) any actual, alleged, possible or potential revocation,
withdrawal, suspension, cancellation or termination of, or any modification to,
any Permit set forth on or required to be set forth on Schedule 4.18. No event
has occurred, and to Seller's Knowledge no circumstance exists, that (with or
without notice or lapse of time) (i) may constitute or result directly or
indirectly in a violation by Seller of, or a failure on the part of Seller to
comply with, any such Permits or (ii) result directly or indirectly in the
revocation, withdrawal, suspension, cancellation or termination of, or any
modification to, any Permit set forth on or required to be set forth on Schedule
4.18. All applications for or renewals of all Permits have been timely filed and
made and no Permit will expire or be terminated as a result of the consummation
of the transactions contemplated by this Agreement. No present or former
shareholder, director, officer or employee of Seller or any
46
Affiliate thereof, or any other Person, owns or has any proprietary, financial
or other interest (direct or indirect) in any Permit which Seller owns,
possesses or uses.
4.19 Environmental Matters.
(a) Seller and the Facilities are in compliance in all material
respects with, and have not been and are not in material violation of or liable
under, any Environmental Law. Neither Seller nor, to the Knowledge of Seller,
any other Person for whose conduct Seller is responsible or has not received,
any actual or, to the Knowledge of Seller, Threatened order or written or other
notice or communication (including but not limited to notices of violations,
consent decrees, judgments, judicial or administrative orders or liens) from (i)
any Governmental Body or Person, of any actual or potential violation or failure
to comply with any Environmental Law, or of any actual or Threatened obligation
to undertake or bear the cost of any Environmental, Health and Safety
Liabilities with respect to any of the Facilities or any of the Purchased
Assets.
(b) There are no pending or, to the Knowledge of Seller, Threatened
claims, Encumbrances or other restrictions of any nature (including but not
limited to notices of violations, consent decrees, judgments, judicial or
administrative orders or liens), resulting from any Environmental, Health and
Safety Liabilities or arising under or pursuant to any Environmental Law, with
respect to or affecting any of the Facilities or any of the Purchased Assets.
(c) Neither Seller, nor, to the Knowledge of Seller, any other Person
for whose conduct Seller is responsible, has received any citation, directive,
notice, Order, summons or warning that relates to Hazardous Activity, Hazardous
Materials, or any alleged, actual or potential violation or failure to comply
with any Environmental Law, or of any alleged, actual or potential obligation to
undertake or bear the cost of any Environmental, Health and Safety Liabilities
with respect to any of the Facilities or any of the Purchased Assets.
(d) Neither Seller nor any other Person for whose conduct Seller is or
may be held responsible, has any Environmental, Health, and Safety Liabilities
with respect to the Facilities or, to the Knowledge of Seller, with respect to
any other properties and assets (whether real, personal or mixed) in which
Seller, has or had an interest, or at any property geologically or
hydrologically adjoining the Facilities or any such other property or assets.
(e) To Seller's Knowledge, there are no Hazardous Materials present on
or in the Environment at the Facilities, other than ordinary amounts of cleaning
and other related janitorial material. Neither Seller nor, to the Knowledge of
Seller, any other Person, has permitted or conducted, or is aware of, any
Hazardous Activity conducted with respect to the Facilities or any of the
Purchased Assets. There has been no Release or, to the Knowledge of Seller,
Threat of Release, of any Hazardous Materials at or from the Facilities or any
of the Purchased Assets.
(f) Seller and the Facilities have all Environmental Permits required
under any provision of any Environmental Law relating to Seller or any of its
Subsidiaries and each Facility is in compliance in all material respects with
all such Environmental Permits.
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(g) Seller has delivered to the Buyer true, complete and correct
copies and results of any reports, studies, analyses, tests or monitoring
possessed or initiated by Seller pertaining to Hazardous Materials or Hazardous
Activities in, on or under the Facilities or concerning compliance by Seller or
any other Person for whose conduct it is or may be held responsible, with
Environmental Laws.
4.20 Insurance. Schedule 4.20 sets forth a complete and accurate list
(showing as to each policy or binder the carrier, policy number, coverage
limits, expiration dates, annual premiums and a general description of the type
of coverage provided) of all policies or binders of insurance of any kind or
nature covering Seller, the Business, the Purchased Assets, or any employees,
properties or assets of Seller relating to the Business, including, without
limitation, policies of life, disability, fire, theft, workers compensation,
employee fidelity and other casualty and liability insurance. Seller has
delivered to Buyer any statements by the accounting firm that reviewed the
Financial Statements with regard to the adequacy of coverage or of the reserves
for claims. All such policies are in full force and effect, insures Seller in
reasonably sufficient amounts against all risks usually insured against by
Persons operating similar businesses or properties of similar size in the
localities where such businesses or properties are located, and are sufficient
for compliance with all applicable Laws and all Contracts to which Seller is a
party. Seller is not in Default under any of such policies or binders, and
Seller has not failed to give any notice or to present any claim under any such
policy or binder in a due and timely fashion. There are no facts upon which an
insurer might be justified in reducing coverage or increasing premiums on
existing policies or binders. There are no outstanding unpaid claims under any
such policies or binders and there are no outstanding unpaid premiums except in
the Ordinary Course of Business of Seller. Such policies and binders are in full
force and effect as of the Closing Date.
4.21 Inventory; Receivables; Payables.
(a) Schedule 4.21(a) contains a complete and accurate list of all
Inventory constituting any part of the Purchased Assets set forth on the Interim
Balance Sheet and the addresses at which the Inventory is located. The Inventory
as set forth on the Interim Balance Sheet or arising since the Interim Balance
Sheet Date was acquired and has been maintained in accordance with the regular
business practices of Seller, consists of new and unused items of a quality and
quantity usable or saleable in the Ordinary Course of Business within the past
six months, and is valued at reasonable amounts based on the normal valuation
policy of Seller at prices equal to the lower of cost or market value on a
first-in-first-out basis. None of such Inventory is obsolete, unusable,
slow-moving, damaged or un-salable in the Ordinary Course of Business, except
for such items of Inventory which have been written down to realizable market
value, or for which adequate reserves have been provided, in the Interim Balance
Sheet.
(b) Schedule 4.21(b) contains an accurate list of accounts receivable
constituting part of the Purchased Assets. All accounts receivable of Seller
constituting any part of the Purchased Assets set forth on the Interim Balance
Sheet and all accounts receivable arising since the Interim Balance Sheet Date,
have arisen from bona fide transactions in the Ordinary Course of Business. None
of the accounts receivable of Seller constituting any part of the Purchased
Assets reflected on the Interim Balance Sheet and arising since the Interim
Balance Sheet Date are subject to any defenses, counterclaims or rights of
setoff and all such accounts
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receivables are fully collectible in the Ordinary Course of Business at the
aggregate recorded amounts thereof, net of any applicable reserves for returns,
discounts, chargebacks, unauthorized deductions or doubtful accounts reflected
thereon, which reserves are adequate and were calculated in a manner consistent
with past custom and practice and in accordance with GAAP consistently applied
or, in the case accounts receivable arising since the Interim Balance Sheet
Date, net of any applicable reserves, the amount of which shall be reasonable
and shall not be greater than the amount of such reserves as set forth on the
Interim Balance Sheet.
(c) All accounts payable of Seller pertaining to the Purchased Assets
or constituting any part of the Assumed Liabilities reflected on the Interim
Balance Sheet or arising after the Interim Balance Sheet Date are the result of
bona fide transactions in the Ordinary Course of Business and have been paid or
will be paid in Seller's Ordinary Course of Business or are not yet due and
payable (in all cases without any extensions of payment terms or waivers of
penalties being sought or extended).
4.22 Purchase Commitments and Outstanding Bids. No outstanding
purchase or outstanding lease commitment of Seller relating to the Business
presently is in excess of the normal, ordinary and usual requirements of the
Business or was made at any price in excess of the now current market price or
contains terms and conditions more onerous than those in the Ordinary Course of
Business. There is no outstanding bid, proposal, Contract or unfilled order of
Seller relating to the Business which will or would, if accepted, result in a
loss or otherwise have a Material Adverse Effect. Except as set forth on
Schedule 4.22, as of the Agreement Date, there are no claims against Seller to
return merchandise relating to the Business by reason of alleged overshipments,
defective merchandise or otherwise, or of merchandise in the hands of customers
under an understanding that such merchandise would be returnable.
4.23 Related Party Transactions. Except as set forth on Schedule 4.23,
none of Seller, any Affiliate thereof, Seller's shareholders or any Affiliate or
Family Member thereof is presently or has, since the Interim Financial
Statements, borrowed any moneys from or has any outstanding debt or other
obligations to Seller or is presently or since January 1, 1998 (and, to Seller's
Knowledge, before January 1, 1998), a party to any transaction with Seller
relating to the Business. Except as set forth on Schedule 4.23, none of Seller,
any Affiliate thereof, or any director, officer or key employee of any such
Persons (a) owns any direct or indirect interest of any kind in (except for
ownership of less than 1% of any public company, provided, that such owner's
role is that solely of a passive investor), or controls or is a director,
officer, employee or partner of, consultant to, lender to or borrower from, or
has the right to participate in the profits of, any Person which is (i) a
competitor, supplier, customer, landlord, tenant, creditor or debtor of Seller
or any of its Subsidiaries, (ii) engaged in a business related to the Business
or (iii) a participant in any transaction to which Seller or any of its
Business-related Subsidiaries is a party or (b) is a party to any Contract with
Seller or any of its Business-related Subsidiaries. Except as set forth on
Schedule 4.23, Seller has no Contract or understanding with any officer,
director or key employee of Seller or any of Seller's shareholders or any
Affiliate or Family Member thereof with respect to the subject matter of this
Agreement, the consideration payable hereunder or any other matter.
4.24 Suppliers and Customers. Schedule 4.24 sets forth a complete and
accurate list of (a) the ten (10) largest suppliers of Seller relating to the
Business, as measured by
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the dollar amount of purchases therefrom and (b) the twenty (20) largest
customers of Seller relating to the Business, as measured by the dollar amount
of purchases thereby, in each case, during Seller's last fiscal year and showing
the approximate total purchases or sales, as applicable, in dollars by Seller,
to or from each such supplier or customer, as applicable, during such fiscal
year. Since the Interim Balance Sheet Date, there has been no Material Adverse
Change in the business relationship or prospects of Seller with any customer or
supplier listed on Schedule 4.24. Seller has not received any communication from
any customer or supplier listed on Schedule 4.24 of any intention to terminate
or materially reduce purchases from or supplies to Seller relating to the
Business.
4.25 No Brokers. Except as set forth on Schedule 4.25, none of Seller
or any of the Affiliates or Representatives of Seller has entered into or will
enter into any Contract, agreement, arrangement or understanding with any
broker, finder or similar agent or Person which will result in the obligation of
Buyer to pay any finder's fee, brokerage commission or similar payment in
connection with the transactions contemplated by this Agreement. Buyer shall
have no responsibility, liability or obligation related to any finder's fee,
brokerage commission or similar payment in connection with any of the items set
forth on Schedule 4.25. Seller agrees to indemnify Buyer against and to hold
Buyer harmless from, any claims for brokerage or similar commission or other
compensation which may be made against Buyer by any third party in connection
with the transactions contemplated hereby, which claim is based upon such third
party having acted as broker, finder, investment banker, advisor, consultant or
appraiser or in any similar capacity on behalf of Seller or any of its
Affiliates.
4.26 Product Warranty and Liabilities. True and complete copies of all
standard written warranties provided generally to customers of Seller relating
to the Business during the past three years have previously been delivered to
Buyer. Seller has no Knowledge and Seller has not received notice of any defect
in workmanship or materials with respect to any products of Seller relating to
the Business or constituting any part of the Purchased Assets which might give
rise to a product warranty or product liability claim.
4.27 No Other Agreements. Neither Seller, nor any of its shareholders,
officers, directors or Affiliates has any legal obligation, absolute or
contingent, to any other Person to sell, assign or transfer any part of the
Purchased Assets (other than Inventory in the Ordinary Course of Business), to
sell any stock of or other equity interest (other than warrants or options in
favor of Seller's officers, directors or employees) in Seller or to effect any
merger, consolidation or other reorganization of Seller or any of its
Subsidiaries or to enter into any agreement with respect thereto.
4.28 Material Misstatements Or Omissions. No representation or
warranty made by Seller in this Agreement or the Disclosure Schedule, contains
or will contain any untrue statement of a material fact, or omits or will omit
to state any material fact necessary to make the statements or facts contained
therein not misleading.
4.29 Solvency. Seller (a) is not and does not have any plans to be in
receivership or dissolution, (b) has not made and does not have any plans to
make any assignment for the benefit of creditors, (c) has not admitted and does
not have any plans to admit in writing its inability to pay its debts as they
mature, (d) has not been and does not have any
50
plans to be adjudicated a bankrupt, or (e) has not filed and does not have any
plans to file a petition in voluntary bankruptcy, a petition or answer seeking
reorganization, or an arrangement with creditors under the federal bankruptcy
law or any other similar law or statute of the United States or any state, nor
shall any such petition have been filed against Seller. Seller is not, and after
giving effect to the transactions contemplated hereby will not, (i) be insolvent
(either because its financial condition is such that the sum of its debts is
greater than the fair value of its assets or because the present fair saleable
value of its assets will be less than the amount required to pay its probable
liability on its debts as they become absolute and matured), (ii) have
unreasonably small capital with which to engage in its business or (iii) plan to
incur debts beyond its ability to pay as they become absolute and matured. After
giving effect to the transactions contemplated hereby, Seller shall not have
incurred debts beyond its ability to pay as they become absolute and matured.
4.30 Fairness Opinion. Seller has received the Fairness Opinion which
states that the transactions contemplated by this Agreement are fair from a
financial point of view to Seller.
4.31 Nova Litigation Settlement. There are no facts, occurrences,
events, conditions or circumstances which, when considered either individually
or with other facts, occurrences, events, conditions or circumstances, would
impair Seller's ability to, or prevent Seller from, fulfilling all of its
obligations in their entirety, under each of the Settlement Agreements in a
timely manner and in accordance with the terms set forth in such Settlement
Agreement. Seller is not in Breach of any of its Liabilities or obligations
under any of the Settlement Agreements.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller that the statements
contained in this Article V are true and correct as of the Agreement Date and as
of the Closing Date, except that the statements contained in Sections 5.2
(Authorization) and 5.3 (Conflicts; Third Party Consents) shall be true and
correct as of the Agreement Date, the Amendment Date and as of the Closing Date.
5.1 Organization of Buyer. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
5.2 Authorization. Buyer has full power and authority to execute and
deliver this Agreement and each other agreement, document, instrument or
certificate contemplated by this Agreement or to be executed by Buyer in
connection with the consummation of the transactions contemplated hereby (such
other agreements, documents, instruments and certificates required to be
executed by Buyer being hereinafter referred to, collectively, as the "Buyer
Documents"), and to consummate the transactions contemplated hereby and thereby.
The execution, delivery and performance by Buyer of this Agreement and each of
the Buyer Documents have been duly authorized by all necessary action on behalf
of Buyer. This
51
Agreement and each of the Buyer Documents have been duly executed and delivered
by Buyer and (assuming the due authorization, execution and delivery by the
other parties hereto and thereto) this Agreement and each of the Buyer Documents
constitute, valid and legally binding obligations of Buyer, enforceable against
Buyer in accordance with their respective terms, except as such enforceability
may be limited by (a) bankruptcy, insolvency, moratorium, reorganization and
other similar laws affecting creditors' rights generally and (b) the general
principles of equity, regardless of whether asserted in a proceeding in equity
or at law.
5.3 Conflicts; Third Party Consents. Neither the execution and
delivery of this Agreement or the Buyer Documents nor the consummation of the
transactions contemplated hereby and thereby, nor compliance by Buyer with any
of the provisions hereof or thereof, will (a) conflict with, or result in the
breach of, any provision of the certificate of formation or the operating
agreement of Buyer, (b) conflict with, violate, result in the breach or
termination of, or constitute a Default under any indebtedness, instrument,
obligation or Contract to which Buyer is a party or by which Buyer or its
properties or assets are bound or (c) violate any Law or any Order of any
Governmental Body by which Buyer or its properties or assets are bound. No Order
of, Consent or Permit from or declaration or filing with, or notification to,
any Person, including, without limitation, any Governmental Body, is required to
be made or obtained by Buyer in connection with the execution, delivery and
performance of this Agreement or the Buyer Documents and the consummation of the
transactions contemplated hereby and thereby.
5.4 Legal Proceedings. There are no Legal Proceedings pending, or to
the knowledge of Buyer, threatened that are reasonably likely to prohibit or
restrain the ability of Buyer to enter into this Agreement or consummate the
transactions contemplated hereby.
5.5 No Brokers. Neither Buyer nor any of its Affiliates or
Representatives has entered into or will enter into any Contract, agreement,
arrangement or understanding with any broker, finder or similar agent or Person
which will result in the obligation of Seller to pay any finder's fee, brokerage
commission or similar payment in connection with the transactions contemplated
hereby.
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ARTICLE VI
COVENANTS OF SELLER AND BUYER
Seller and Buyer each covenant with the other as follows:
6.1 Further Assurances. Upon the terms and subject to the conditions
contained in this Agreement, the parties agree, before and after the Closing,
(a) to use all reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement
and the Ancillary Agreements, (b) to execute any documents, instruments or
conveyances of any kind which may be reasonably necessary or advisable to carry
out any of the transactions contemplated hereunder or thereunder, and (c) to
cooperate with each other in connection with the foregoing. As promptly as
possible after the Agreement Date, Seller and each of its Subsidiaries will make
all filings required by Law to be made by them in order to consummate the
transactions contemplated hereby, will obtain all other required Consents
(provided, that Buyer shall not be required to make any payments, commence
litigation or agree to modifications of the terms of any Contracts or Leases in
order to obtain any such Consent) and Permits and will apply for any new Permits
necessary to consummate the transactions contemplated hereby. As promptly as
possible after the Agreement Date, Buyer will give all notices to third parties
and make all filings required by Law to be made by it in order to consummate the
transactions contemplated hereby.
6.2 Conduct of Business. From the Agreement Date through the Closing
Date, Seller shall, except as permitted by this Agreement or as consented to by
Buyer in writing, conduct the Business only in the Ordinary Course of Business
and (i) will not take any action inconsistent with this Agreement or any of the
Ancillary Agreements or with the consummation of the transactions contemplated
hereby and thereby, and (ii) use its Best Efforts to maintain the Purchased
Assets in a state of repair and condition that complies with Laws and is
consistent with the requirements of the Business as it is presently conducted.
In addition and without limiting the generality of the foregoing, Seller shall
not, and except as specifically permitted by this Agreement or as consented to
by Buyer in writing, take any affirmative action, or fail to take any reasonable
action, in each case which would reasonably be expected to result in the
occurrence of any of the changes or events listed in Section 4.9 of this
Agreement.
6.3 Stockholders Meeting; Proxy Statement.
(a) Seller shall, to the extent permitted or required under Maryland
law, take all action reasonably necessary in accordance with applicable law and
Seller's Charter and Bylaws to duly call, give notice of, convene and hold a
meeting of its stockholders (the "Stockholders Meeting") as promptly as
practicable after the Agreement Date for the purpose of, among other things,
considering and taking action, as necessary, upon the transactions contemplated
by this Agreement.
(b) As promptly as practicable after the Agreement Date, Seller shall
take, or cause to be taken, all actions, and do, or cause to be done, all
things, reasonably necessary, proper or advisable to (i) prepare and file with
the SEC any documents or materials, including,
53
but not limited to, the proxy statement (including any amendments thereto) and
related materials for the Stockholders Meeting (the "Proxy Materials") and (ii)
have the Proxy Materials cleared by the SEC. The Proxy Materials shall contain
the recommendation of Seller's Board of Directors that the stockholders of
Seller vote in favor of the approval of the transactions contemplated by this
Agreement. In the event Seller's Board of Directors withdraws or withholds its
recommendation, the transactions contemplated by this Agreement shall still be
submitted to Seller's stockholders for approval, provided that, nothing herein
shall be construed to give Seller's Board of Directors a right to withdraw or
withhold its recommendation except as expressly set forth in, and in accordance
with, Section 6.11(f), and except as required under applicable Law. Seller shall
notify Buyer promptly of the receipt of any comments on, or any requests for
amendments or supplements to, the Proxy Materials by the SEC, and Seller shall
supply Buyer with copies of all written correspondence between Seller and its
representatives, on the one hand, and the SEC or members of its staff, on the
other, with respect to the Proxy Materials. Seller shall use its Best Efforts to
respond promptly to any comments made by the SEC with respect to the Proxy
Materials. Seller and Buyer shall cooperate with each other in preparing the
Proxy Materials, and Seller and Buyer shall each use its Best Efforts to obtain
any consents, if any required to be included in the Proxy Materials. Buyer shall
provide any information Seller reasonably requests for inclusion in the Proxy
Materials. Seller and, if applicable, Buyer each agrees promptly to correct any
information provided by it for use in the Proxy Materials if and to the extent
that such information shall have become false or misleading in any material
respect, and Seller further agrees to take all steps necessary to cause the
Proxy Materials, as so corrected, to be filed with the SEC and to be
disseminated promptly to holders of shares of common stock of Seller, in each
case as and to the extent required by applicable Law.
(c) Seller agrees that the information contained in the Proxy
Materials (other than information, if any, with respect to Buyer or any of its
Affiliates, which shall have been supplied in writing by them or any of their
authorized representatives expressly for use in or in preparing the Proxy
Materials) will not, at the date the Proxy Materials are filed with the SEC or
at the date of mailing to Seller's stockholders or at the date of the
Stockholders Meeting, contain any statement that, at the time and in light of
the circumstances under which it is made, is false or misleading with respect to
any material fact, and will not omit to state any material fact required to be
stated therein or necessary to make any statement therein of a material fact, in
the light of the circumstances under which it is made, not misleading or to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Stockholders Meeting. The Proxy Materials will
comply as to form in all material respects with the Exchange Act and the rules
and regulations of the SEC thereunder.
(d) Seller shall retain a nationally recognized firm to assist in the
solicitation of proxies for the Stockholders Meeting (the "Proxy Solicitor"),
which Proxy Solicitor shall be acceptable to Buyer in its reasonable discretion.
Subject to applicable Law, Seller shall cooperate with and use its Best Efforts
to assist the Proxy Solicitor in the solicitation of proxies for the
Stockholders Meeting. All fees, expenses and disbursements of the Proxy
Solicitor shall be borne equally by Buyer and Seller.
6.4 Consents. Notwithstanding anything in this Agreement to the
contrary, this Agreement shall not constitute an agreement to assign any of the
Purchased Assets or any claim or right or any benefit arising thereunder or
resulting therefrom if an attempted assignment
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thereof, without the Consent of a third party thereto, would constitute a
Default thereof or in any way adversely affect the rights of Buyer thereunder or
thereto. Buyer and Seller further agree that, although Buyer and Seller agree to
cooperate with each other in attempting to obtain all Consents, any failure to
obtain any Consents by either Buyer or Seller, as the case may be, for any
reason whatsoever shall not constitute a Breach of this Agreement by Seller or
Buyer, as the case may be. If any of the Purchased Assets are not assigned to
Buyer on the Closing Date due to circumstances described in this Section 6.4,
then Buyer shall not assume any Liabilities related to or arising out of such
non-transferred Purchased Asset until such Purchased Asset can be properly
transferred to Buyer and Buyer has all of the benefits of such Purchased Asset.
If any Consent is not obtained, or if an attempted assignment thereof would be
ineffective or would affect the rights thereunder so that Buyer would not
receive all such rights, Seller will use its Best Efforts to provide to Buyer
the benefits of such Purchased Assets, including, without limitation,
enforcement for the benefit of Buyer of any and all rights of Seller against a
third party thereto arising out of the Default or cancellation by such third
party or otherwise. Notwithstanding anything in this Agreement to the contrary,
nothing contained in this Section 6.4 shall be deemed to constitute a waiver or
have any effect on the conditions to Buyer's obligations to consummate the
transactions contemplated hereby as set forth in Section 7.2(e).
6.5 Notification of Certain Matters. From the Agreement Date to the
Closing Date, Seller shall give prompt notice to Buyer of (a) the occurrence, or
failure to occur, of any event which occurrence or failure would be likely to
cause any representation or warranty contained in this Agreement or in any
exhibit or schedule hereto to be untrue or inaccurate in any respect and (b) any
failure of Seller or any of its Affiliates or Representatives, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
such Person under this Agreement or any exhibit or schedule hereto; provided,
however, that such disclosure shall not be deemed to cure any breach of a
representation, warranty, covenant or agreement or to satisfy any condition.
Seller shall promptly notify Buyer of any default, the threat or commencement of
any Legal Proceeding, or any development that occurs before the Closing that
could have a Material Adverse Effect. In addition, during such period, Seller
will confer with Buyer concerning operational matters of a material nature and
otherwise report periodically to Buyer concerning the status of the Business.
6.6 Employee Matters.
(a) Seller shall be solely responsible for all obligations and
Liabilities arising under or with respect to all Employee Plans. Buyer shall not
assume any Employee Plan or any obligation or Liability thereunder.
(b) Buyer shall extend offers of employment to those of Seller's
employees whom it desires to hire ("Potential Employees"), which offers shall be
on terms and conditions which Buyer shall determine in its sole discretion.
Seller shall terminate the employment of all Potential Employees that are
actually hired by Buyer ("Rehired Employees") immediately prior to the Closing
and shall cooperate with and use its Best Efforts to assist Buyer in its efforts
to secure satisfactory employment arrangements with Potential Employees. The
participation of each Rehired Employee under the Employee Plans shall cease as
of the Closing Date. Nothing contained in this Agreement shall confer upon any
employee of Seller any right with respect to continued employment by Buyer, nor
shall anything herein interfere with the right of Buyer to
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terminate the employment of any Rehired Employee at any time, with or without
cause, or restrict Buyer in the exercise of its independent business judgment in
modifying any of the terms and conditions of the employment of the Rehired
Employees.
(c) Seller shall comply with the requirements of the WARN Act with
respect to any "plant closing" or "mass layoff", as those terms are defined in
the WARN Act, which may result from Seller's termination of the employment of
any of its employees in connection with the transactions contemplated by this
Agreement.
(d) Seller and its ERISA Affiliates (as defined below) shall comply
with the provisions of the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA"), as set forth in Section 4980B of the Code and Part 6
of Title I of the Employee Retirement Income Security Act of 1974, as amended,
with respect to any employee, former employee or beneficiary of any such
employee or former employee who is covered under any Group Health Plan (as
defined in Section 5001(b)(1) of the Code) maintained by Seller and its ERISA
Affiliates as of the Closing Date or whose "qualifying event," within the
meaning of Section 4980B(f) of the Code, occurs on or prior to the Closing Date,
whether pursuant to the provisions of COBRA or otherwise. For purposes of this
Agreement, "ERISA Affiliate" shall mean any entity which is (or at any relevant
time was) a member of a "controlled group of corporations" with, under "common
control" with, or a member of an "affiliated service group" with, Seller as
defined in Section 414(b), (c), (m) or (o) of the Code.
(e) Buyer and its ERISA Affiliates shall comply with the provisions of
COBRA, as set forth in Section 4980B of the Code and Part 6 of Title I of ERISA
with respect to each Rehired Employee after the Closing Date who is covered
under any Group Health Plan (as defined in Section 5001(b)(1) of the Code)
maintained by Buyer and its ERISA Affiliates after the Closing Date or whose
"qualifying event," within the meaning of Section 4980B(f) of the Code, occurs
after the Closing Date, whether pursuant to the provisions of COBRA or
otherwise.
(f) No provision of this Agreement shall create any third party
beneficiary rights in any Rehired Employee, any beneficiary or dependents
thereof, or any collective bargaining representative thereof, with respect to
the compensation, terms and conditions of employment and benefits that may be
provided to any Rehired Employee by Buyer or under any benefit plan which Buyer
may maintain.
(g) Nothing contained in this Agreement shall confer upon any Rehired
Employee any right with respect to continued employment by Buyer, nor shall
anything herein interfere with the right of Buyer to terminate the employment of
any Rehired Employee at any time, with or without cause, or restrict Buyer in
the exercise of its independent business judgment in modifying any of the terms
and conditions of the employment of the Rehired Employees.
(h) For a period of two years after Closing, Seller shall not,
directly or indirectly, solicit for employment any employee of Seller whose
employment is continued by Buyer after the Closing Date or any employee of Buyer
or any successor or Affiliate of Buyer which is engaged in the Business, unless
Buyer first terminates the employment of such employee or gives its written
consent to such employment or offer of employment; provided,
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however, Seller shall not be prohibited from hiring an employee of Buyer (other
than a former employee of Seller whose employment was continued by Buyer after
the Closing Date) who, with no advance knowledge of Seller, terminates
employment with Buyer and applies for a posted job with Seller.
(i) Seller shall, prior to the Closing, pay and be solely responsible
for all obligations and Liabilities under all outstanding promissory notes
issued to Rehired Employees under the Sonic Foundry, Inc. 2001 Deferred
Compensation Plan (the "Deferred Compensation Plan") (regardless of whether such
amounts have become due under the terms of any promissory note or otherwise
under the Deferred Compensation Plan), and shall pay and be solely responsible
for any and all stock grant bonuses payable to Rehired Employees under the
Deferred Compensation Plan.
6.7 Collection of Accounts Receivable and Letters of Credit. At the
Closing, Buyer will acquire hereunder, and thereafter Buyer or its designee
shall have the right and authority to collect for Buyer's or its designee's
account, all receivables, letters of credit and other items which constitute a
part of the Purchased Assets, and Seller shall, and shall cause its Subsidiaries
to, within five business days after receipt of any payment in respect of any of
the foregoing, properly endorse and deliver to Buyer any letters of credit,
documents or checks received on account of or otherwise relating to any such
receivables, letters of credit or other items. Seller shall, and shall cause its
Subsidiaries to, promptly transfer or deliver to Buyer or its designee any cash
or other property that Seller or any of its Subsidiaries may receive in respect
of any deposit, prepaid expense, claim, contract, license, lease, commitment,
sales order, purchase order, letters of credit or receivable of any character,
or any other item constituting a part of the Purchased Assets.
6.8 Books and Records. Each party hereto agrees that it will cooperate
with and make available to the other party, during normal business hours, all
Books and Records, information and employees (without substantial disruption of
employment) retained and remaining in existence after the Closing which are
necessary or useful in connection with any Tax inquiry, audit, investigation or
dispute, any litigation or investigation or any other matter requiring any such
Books and Records, information or employees for any reasonable business purpose.
The party requesting any such Books and Records, information or employees shall
bear all of the out-of-pocket costs and expenses (including, without limitation,
reasonable attorneys' fees, but excluding reimbursement for salaries and
employee benefits) reasonably incurred in connection with providing such Books
and Records, information or employees. All information received pursuant to this
Section 6.8 shall be kept confidential by the party obtaining such information,
subject to any disclosure that is required to be made by such party in order to
comply with applicable Laws or the rules or regulations of any securities
exchange upon which its securities are traded.
6.9 Tax Matters.
(a) Payment. Seller shall pay, or cause to be paid, when due all Taxes
for which Seller is or may be liable that are or may become payable with respect
to all taxable periods ending on, prior to or after the Closing Date.
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(b) Cooperation and Records Retention. Seller and Buyer shall (i) each
provide the other with such assistance as may reasonably be requested by any of
them in connection with the preparation of any return, audit, or other
examination by any Tax authority or Legal Proceedings relating to Liability for
Taxes, (ii) each retain and provide the other with any records or other
information that may be relevant to such return, audit or examination, Legal
Proceeding or determination, and (iii) each provide the other with any final
determination of any such audit or examination, proceeding, or determination
that affects any amount required to be shown on any Tax Returns of the other for
any period. Without limiting the generality of the foregoing, Buyer and Seller
shall each retain, until the applicable statutes of limitations (including any
extensions) have expired, copies of all Tax Returns, supporting work schedules,
and other records or information that may be relevant to such returns for all
Tax periods or portions thereof ending on or before the Closing Date and shall
not destroy or otherwise dispose of any such records without first providing the
other party with a reasonable opportunity to review and copy the same.
(c) Payment of Liabilities. Following the Closing Date, Seller shall
pay promptly when due all of the Liabilities for Taxes of Seller and other debts
and Liabilities of Seller, other than the Assumed Liabilities; provided,
however, that this covenant shall not apply to that portion (or all) of any debt
that Seller is contesting in good faith.
(d) Form W-2s. Pursuant to Revenue Procedure 96-60 (1996-2 C.B. 399),
provided that Seller provides Buyer with all necessary payroll records for the
calendar year which includes the Closing Date, Buyer shall furnish a Form W-2 to
each employee employed by Buyer who had been employed by Seller disclosing all
wages and other compensation paid for such calendar year, and taxes withheld
therefrom, and Seller shall be relieved of the responsibility for doing so. To
the extent reasonably requested by Buyer, Seller will supply T4 and T4A forms in
order to assure full compliance with applicable Canadian Laws.
6.10 Bulk Sales. It may not be practicable to comply or attempt to
comply with the procedures of the "Bulk Sales Act" or similar law of any or all
of the states in which the Purchased Assets are situated or of any other state
which may be asserted to be applicable to the transactions contemplated hereby.
Accordingly, to induce Buyer to waive any requirements for compliance with any
or all of such laws, Seller hereby agrees that the indemnity provisions of
Article VIII shall apply to any Losses of Buyer arising out of or resulting from
the failure of Seller or Buyer to comply with any such laws.
6.11 No-Shop Clause.
(a) From and after the date of the execution and delivery of the
Original Agreement by Seller until the termination of this Agreement or the
consummation of the transactions contemplated hereby, Seller will not, without
the prior written consent of Buyer or except as otherwise permitted by this
Agreement directly or indirectly: (i) sell, assign, lease, pledge or otherwise
transfer or dispose of all or any portion of the Purchased Assets, the Business
or any material portion or amount of equity securities of Seller, whether
through merger, consolidation, business combination, asset sale, share exchange
or otherwise (and including in connection with an offer for all or a material
portion of Seller's stock or assets) (each of such actions being an "Acquisition
Proposal"); (ii) solicit offers for, offer up or seek any
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Acquisition Proposal; (iii) initiate, encourage or provide any documents or
information to any third party in connection with, discuss or negotiate with any
person regarding any inquires, proposals or offers relating to any Acquisition
Proposal; or (iv) enter into any agreement or discussions with any party (other
than Buyer) with respect to any Acquisition Proposal.
(b) Without limiting the foregoing, it is agreed that any violation of
the restrictions set forth in Section 6.11(a) by any of Seller's Representatives
or any Subsidiary of Seller or otherwise, shall be a breach of Section 6.11(a)
by Seller. Upon execution of the Original Agreement, Seller has, and has caused
its Subsidiaries and Representatives to, cease immediately and caused to be
terminated any and all existing discussions or negotiations with any Persons
conducted heretofore with respect to an Acquisition Proposal and promptly
requested that all confidential information with respect thereto furnished on
behalf of Seller be returned. For the avoidance of doubt, upon execution of this
Agreement, Seller shall, and shall cause its Subsidiaries and Representatives
to, cease immediately and cause to be terminated any and all existing
discussions or negotiations with any Persons conducted heretofore with respect
to an Acquisition Proposal and promptly request that all confidential
information with respect thereto furnished on behalf of Seller be returned.
(c) Seller shall, as promptly as practicable (and in no event later
than 24 hours after receipt thereof), advise Buyer of any inquiry received by it
relating to any potential Acquisition Proposal and of the material terms of any
proposal or inquiry, including the identity of the Person and its Affiliates
making the same, that it may receive in respect of any such potential
Acquisition Proposal, or of any information requested from it or of any
negotiations or discussions being sought to be initiated with it, shall furnish
to Buyer a copy of any such proposal or inquiry, if it is in writing, or a
written summary of any such proposal or inquiry, if it is not in writing, and
shall keep Buyer fully informed on a prompt basis with respect to any
developments with respect to the foregoing.
(d) Notwithstanding the provisions of Section 6.11(a), prior to the
receipt of the approval of the transactions contemplated by this Agreement by
Seller's stockholders, Seller may, in response to an unsolicited, bona fide
written Acquisition Proposal from a Person (the "Potential Acquiror") which
Seller's Board of Directors determines in good faith, after consultation with a
nationally recognized financial advisor and its outside legal counsel,
constitutes a Superior Proposal (and continues to constitute a Superior Proposal
after taking into account any modifications proposed by Buyer during any five
(5) Business Day period referenced below), take the following actions (but only
if and to the extent that Seller's Board of Directors concludes in good faith,
following the receipt of advice of its outside legal counsel, that the failure
to do so would constitute a breach of its fiduciary obligations under applicable
Law, and subject to the compliance with Section 6.3); provided that, Seller has
first given Buyer written notice that states that Seller has received such
Superior Proposal and otherwise includes the information required by Section
6.11(c) (the "Superior Proposal Notice") and five (5) Business Days have passed
since the receipt of the Superior Proposal Notice by Buyer:
(i) furnish nonpublic information to the Potential Acquiror,
provided that (A) (1) concurrently with furnishing any such nonpublic
information to the Potential Acquiror, Seller gives Buyer written notice of
its intention to furnish nonpublic information and (2) Seller receives from
the Potential Acquiror an executed
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confidentiality agreement containing customary limitations on the use and
disclosure of all nonpublic written and oral information furnished to the
Potential Acquiror on its behalf, the terms of which are at least as
restrictive as to the Potential Acquiror as the terms contained in the
Confidentiality Agreement are as to SPD, and containing customary
standstill provisions and (B) contemporaneously with furnishing any such
nonpublic information to the Potential Acquiror, Seller furnishes such
nonpublic information to Buyer; and
(ii) engage in negotiations with the Potential Acquiror with
respect to the Superior Proposal, provided that concurrently with entering
into negotiations with the Potential Acquiror, it gives Buyer written
notice of the its intention to enter into negotiations with the Potential
Acquiror.
(e) For a period of not less than five (5) Business Days after Buyer's
receipt of each Superior Proposal Notice, Seller shall, if requested by Buyer,
negotiate in good faith with Buyer to revise this Agreement so that the
Acquisition Proposal that constituted a Superior Proposal no longer constitutes
a Superior Proposal (a "Former Superior Proposal"). The terms and conditions of
this Section 6.11 shall again apply to any inquiry or proposal made by any
Person who withdraws a Superior Proposal or who made a Former Superior Proposal
(after withdrawal or after such time as their proposal is a Former Superior
Proposal).
(f) In response to the receipt of a Superior Proposal that has not
been withdrawn and continues to constitute a Superior Proposal after Seller's
compliance with Sections 6.11(b)-(e), Seller's Board of Directors may withhold
or withdraw its recommendation that the stockholders of Seller vote in favor of
the approval of the transactions contemplated by this Agreement and, in the case
of a Superior Proposal that is a tender or exchange offer made directly to the
stockholders of Seller, may recommend that its stockholders accept the tender or
exchange offer (any of the foregoing actions, whether by Seller's Board of
Directors or a committee thereof, a "Change of Recommendation"), if both of the
following conditions are met:
(i) the Stockholders Meeting has not occurred; and
(ii) the Board of Directors of Seller has concluded in good
faith, following the receipt of advice of its outside legal counsel, that,
in light of such Superior Proposal, the failure of Seller's Board of
Directors to effect a Change of Recommendation would result in a breach of
its fiduciary obligations to the stockholders of Seller under applicable
Law.
(g) Notwithstanding anything to the contrary contained in this
Agreement, the obligation of Seller to call, give notice of, convene and hold
the Stockholders Meeting and to hold a vote of the stockholders of Seller on
this Agreement shall not be limited or otherwise affected by the commencement,
disclosure, announcement or submission to it of any Acquisition Proposal
(whether or not a Superior Proposal), or by any Change of Recommendation.
6.12 Nova Litigation Settlement Covenants. From and after the date of
the execution and delivery of the Original Agreement by Seller and until the
Nova Completion Date, Seller shall use its Best Efforts to ensure that (i) all
of its obligations under each of the
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Settlement Agreements are fulfilled in their entirety, in a timely manner and in
accordance with the terms set forth in such Settlement Agreement, and (ii) there
is no Breach by Seller of any of its Liabilities or obligations under any of the
Settlement Agreements.
ARTICLE VII
CONDITIONS PRECEDENT TO CLOSING
7.1 Conditions to Seller's Obligations to Close. The obligations of
Seller to consummate the transactions provided for hereby are subject to the
satisfaction, before or on the Closing Date, of each of the conditions set forth
below in this Section 7.1, any of which may be waived by Seller.
(a) Representations, Warranties and Covenants. (i) All representations
and warranties of Buyer contained in this Agreement, except for those
representations and warranties the Breach of which could not (individually or in
the aggregate) reasonably be expected to have a Condition-Related Material
Adverse Affect, shall be true and correct at and as of the Agreement Date and at
and as of the Closing Date, except (A) the representations and warranties set
forth in Sections 5.2 and 5.3 shall be true and correct at and as of the
Agreement Date, at and as of the Amendment Date and at and as of the Closing
Date, and (B) to the extent such representations and warranties expressly relate
solely to an earlier date, and (ii) Buyer shall have performed and satisfied all
agreements and covenants, except for those covenants and agreements the breach
of which could not (individually or in the aggregate) reasonably be expected to
have a Condition-Related Material Adverse Affect, required hereby to be
performed by it before or on the Closing Date.
(b) No Actions or Court Orders. There shall not be any Regulation or
Court Order that makes the purchase and sale of the Business or the Purchased
Assets contemplated hereby illegal or otherwise prohibited.
(c) Ancillary Agreements. Buyer shall have executed and delivered the
Ancillary Agreements to which Buyer is a party.
7.2 Conditions to Buyer's Obligations to Close. The obligations of
Buyer to consummate the transactions provided for hereby are subject to the
satisfaction, before or on the Closing Date, of each of the conditions set forth
below in this Section 7.2, any of which may be waived by Buyer.
(a) Representations, Warranties and Covenants. (i) All representations
and warranties of Seller contained in this Agreement, except for those
representations and warranties the Breach of which could not (individually or in
the aggregate) reasonably be expected to have a Condition-Related Material
Adverse Affect, shall be true and correct at and as of the Agreement Date and at
and as of the Closing Date, except (A) the representations and warranties set
forth in Sections 4.2, 4.5, 4.9 and 4.27 shall be true and correct at and as of
the Agreement Date, at and as of the Amendment Date and at and as of the Closing
Date, and (B) to the extent such representations and warranties expressly relate
solely to an earlier date, and (ii) Seller shall have performed and satisfied
all agreements and covenants, except for those covenants and
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agreements the breach of which (individually or in the aggregate) could not
reasonably be expected to have a Condition-Related Material Adverse Affect,
required hereby to be performed by it before or on the Closing Date.
Notwithstanding anything to the contrary contained herein, solely for purposes
of this Section 7.2(a) (and without affecting Section 9.3(a)(iii) or Section
9.3(a)(iv)) no effect shall be given to the materiality and/or Material Adverse
Affect/Material Adverse Change qualifiers contained in any of the
representations and warranties set forth in Article IV.
(b) No Actions or Court Orders. No Action by any Governmental Body or
other Person shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated hereby and which could
reasonably be expected to damage Buyer, the Purchased Assets or the Business
materially if the transactions contemplated hereby are consummated, and which
could (individually or in the aggregate) have a Condition-Related Material
Adverse Effect. There shall not be any Regulation or Court Order that makes the
purchase and sale of the Business or the Purchased Assets contemplated hereby
illegal or otherwise prohibited.
(c) Authorization. Buyer shall have received from Seller a copy of
resolutions adopted by the Board of Directors of Seller approving this Agreement
and the Ancillary Agreements to which Seller is a party and the transactions
contemplated hereby or thereby and Seller shall have obtained from its
stockholders the approval of the transactions contemplated by this Agreement,
which approval shall be by the vote in favor of such transactions by shares
representing at least two-thirds of the shares eligible to vote.
(d) Ancillary Agreements. Seller shall have executed and delivered the
Ancillary Agreements to which it is a party.
(e) Consents. All Permits, consents, approvals and waivers from
Governmental Bodies and other Persons set forth on Schedule 7.2(e) shall have
been obtained, except to the extent that the failure to obtain such Permits,
consents, approvals and waivers could not reasonably be expected to materially
damage Buyer after the Closing.
(f) No Material Adverse Change. There shall have been no
Condition-Related Material Adverse Change.
(g) Indebtedness. Seller shall have provided to Buyer evidence,
acceptable to Buyer in its reasonable discretion, that either (i) Seller shall
have paid in full any and all amounts outstanding (whether as principal,
interest or otherwise) in connection with all of the Paid-Down Debt or (ii) that
any and all amounts outstanding (whether as principal, interest or otherwise) in
connection with any and all of the Paid-Down Debt shall be paid in full upon the
payment of a specified amount to a specified account (pursuant to payment
instructions included in such payoff certificate) on the Closing Date (which
payments shall be deemed to be payment to Seller of the applicable portion of
the Consideration).
(h) Employees. At least (i) one (1) of the two (2) employees listed
under "Key Employees -- Group 1" and (ii) three (3) of the four (4) employees
listed under "Key Employees -- Group 2" on Exhibit G-2 shall have agreed to
accept employment with Buyer (so
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long as Buyer offers a total compensation package that is at least 110% of such
employees' current base salary (which amount has been provided by Seller to
Buyer) and an employment term of at least one year) pursuant to an agreement
substantially in the form of the Employment Agreement attached hereto as Exhibit
G-1, and the employment by Seller or any Affiliate of Seller of all of the
employees listed under "Other Employees" on Exhibit G-2 shall have been
terminated.
(i) Non-Competition Agreement. The Non-Competition Agreement between
Buyer and Seller, and between Buyer and Monty Schmidt (Seller's President and
Director), each dated as of the Agreement Date, in the form attached hereto as
Exhibit H-1 and Exhibit H-2 respectively, shall not have terminated and shall be
in full force and effect.
(j) Officer's Certificate. Seller shall furnish Buyer with such
certificates of Seller's officers (including incumbency certificates) as Buyer
may reasonably request in order to evidence compliance with the conditions set
forth in this Section 7.2.
(k) Opinion of Counsel. Buyer shall have received an opinion from
counsel to Seller, dated as of the Closing Date, and reasonably satisfactory in
form and substance to Buyer, substantially in the form attached hereto as
Exhibit K.
(l) Fairness Opinion. Seller shall have received an opinion that the
transactions contemplated by this Agreement are fair from a financial point of
view to Seller from Silverwood Partners to Seller's Board of Directors dated as
of April 26, 2003, which opinion shall be in the form attached hereto as Exhibit
M (the "Fairness Opinion").
(m) Tax Clearance. Seller shall have provided notice to any state
taxing authority requiring such notice of the transactions contemplated by this
Agreement and shall have used reasonable efforts to obtain any clearance
certificate or similar document(s), if any, that may be required by such state
taxing authority in order to relieve Buyer of any obligation to withhold any
portion of the Consideration.
(n) Non-Foreign Status. Seller shall have furnish Buyer with an
affidavit, stating, under penalty of perjury, the transferor's United States
taxpayer identification number and that the transferor is not a foreign person,
pursuant to Section 1445(b)(2) of the Code.
ARTICLE VIII
INDEMNIFICATION
8.1 Survival of Representations, Etc. All of the representations and
warranties contained in this Agreement, other than the representations and
warranties contained in Sections 4.1, 4.2, 4.7, 4.10, 4.14, 4.17, 4.19, 4.25,
4.31, 5.1, 5.2 and 5.5 and other than the representations and warranties
contained in subsections (b), (c), (i), (k), (o) of Section 4.12 and in the
penultimate sentence of subsection (f) of Section 4.12, shall survive the
Closing and shall continue in full force and effect for a period of three years
after the Closing Date. The representations and warranties contained in Sections
4.10, 4.14, 4.17 and 4.19 shall survive the Closing and shall terminate only
when the applicable statutes of limitations with respect to the
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liabilities in question expire, in each case giving effect to any tolling or
extensions thereof. The representations and warranties contained in Sections
4.1, 4.2, 4.7, 4.25, 5.1, 5.2 and 5.5, the representations and warranties
contained in subsections (b), (c), (i), (k), (o) of Section 4.12 and in the
penultimate sentence of subsection (f) of Section 4.12 and all covenants and
obligations of the parties made herein shall survive the Closing and shall
continue in full force and effect indefinitely, but in no event shall the
survival period extend beyond the expiration of the statutory term (including
any renewals or extensions thereof) of the trademark, copyright or patent at
issue. The right to indemnification, payment of Losses or other remedy based on
such representations, warranties, covenants and obligations will not be affected
by any investigation conducted with respect to, or any knowledge of the party
entitled to such right to indemnification acquired (or capable of being
acquired) at any time, whether before or after the Closing Date, with respect to
the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant or obligation. The waiver of any condition based on the
accuracy of any representation or warranty, or on the performance of or
compliance with any covenant or obligation, will not affect the right to
indemnification, payment of Losses, or other remedies based on such
representations, warranties, covenants and obligations.
8.2 Indemnification.
(a) By Seller. Subject to Section 8.3, Seller hereby agrees to
indemnify, protect, defend, release and hold Buyer and its directors, officers,
managers, members, employees, agents, successors, Affiliates and assigns
(collectively, the "Buyer Indemnified Parties") harmless from and against any
and all Losses incurred in connection with, arising out of, resulting from or
incident to:
(i) any Breach or inaccuracy of any representation or warranty of
Seller set forth in this Agreement or contained in any certificate
delivered by or on behalf of Seller pursuant to this Agreement;
(ii) any Breach of any covenant or other agreement made by Seller
in or pursuant to this Agreement;
(iii) any Excluded Liability;
(iv) any Liability imposed upon Buyer by reason of Buyer's status
as transferee of the Business or the Purchased Assets other than any
Assumed Liability;
(v) any Liability (A) imposed upon Buyer by reason of Buyer's
decision not to hire any of Seller's employees (other than the employees
listed on Schedules G-2 to the extent such Liability results from Buyer's
unreasonable refusal to offer employment with a base salary that is no less
than one hundred ten percent (110%) of such employees' current base salary
(as Seller has provided to Buyer) and, with respect to those employees
listed under the heading `Key Employees--Group 1' and `Key Employees--Group
2'on Schedule G-2, an employment term of at least one year), other than any
Liability arising out of Buyer's violation of any federal or state
employment discrimination Law in its hiring practices with respect to
Seller's employees,
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or (B) under the WARN Act which may result from any termination of any
employees of Seller in connection with the transactions contemplated by
this Agreement;
(vi) any Liability arising under or with respect to any and all
Employee Plans, and any Liability with respect to any of Seller's
employees, former employees or service providers relating to acts or
omissions which occurred on or prior to the Closing Date;
(vii) (A) any Environmental Laws, including Remedial Actions, or
(B) the Release or Threat of Release or use of Hazardous Materials at,
under, on, by, or from any of the Owned Real Property or Leased Real
Property or otherwise attributable to the operation of Seller or to the
Business (collectively, "Environmental Damages"), to the extent such
Environmental Damages arise out of, relate to or are otherwise attributable
to acts or omissions occurring on or prior to the Closing Date;
(viii) any product shipped or manufactured by, or any services
provided by, Seller prior to the Closing Date; or
(ix) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based on any agreement or understanding
alleged to have been made by such Person with Seller or any shareholder
thereof (or any Person acting (or purportedly acting) on behalf of any such
Person) in connection with the transactions contemplated by this Agreement.
(b) By Buyer. Subject to Section 8.3, Buyer and SPD hereby agree
(without duplication) to indemnify and hold Seller and its directors, officers,
employees, agents, successors and assigns (collectively, the "Seller Indemnified
Parties"), harmless from and against any and all Losses incurred in connection
with, arising out of, resulting from or incident to:
(i) any Breach or inaccuracy of any representation or warranty of
Buyer set forth in this Agreement or contained in any certificate delivered
by or on behalf of Buyer pursuant to this Agreement;
(ii) any Breach of any covenant or other agreement made by Buyer
in or pursuant to this Agreement;
(iii) after the Closing, any Assumed Liability; or
(iv) any Liability with respect to the Rehired Employees,
including, without limitation, any Liability arising out of or related to
termination of their employment and any claim for unfair labor practices,
but only to the extent such Liability arises from actions taken by Buyer
after the Closing Date.
(c) The term "Losses" as used in this Section 8.2 is not limited to
matters asserted by third parties against any indemnified party, but includes
Losses incurred or sustained by an indemnified party in the absence of third
party claims. Payments by an indemnified party of amounts for which such
indemnified party is indemnified under this Article VIII shall not be a
condition precedent to recovery.
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8.3 Limitations on Indemnification for Certain Breaches. An
indemnifying party shall not have any Liability under Section 8.2(a)(i) or
8.2(b)(i) for any Claims unless the aggregate amount of Losses to the
indemnified parties finally determined to arise thereunder exceeds Two Hundred
Sixty Five Thousand Dollars ($265,000) (the "Threshold Amount"), in which event
the indemnifying party shall be required to pay the full amount of such Losses
in excess of the Threshold Amount, but in no event shall Seller, on one hand, or
Buyer and SPD, on the other hand, be liable for any such Losses in excess of
Fifteen Million Seven Hundred Seventy Thousand Dollars ($15,770,000).
Notwithstanding anything to the contrary in this Agreement or in any Ancillary
Agreement, the limitations set forth in this Section 8.3 shall not apply to any
Losses incurred in connection with, arising out of, resulting from or incident
to (i) any Breach or inaccuracy of the representation and warranty of Seller set
forth in Section 4.31, (ii) any Breach of the covenant or other agreement made
by Seller in Section 6.12, or (iii) any failure by Seller to fulfill all of its
obligations in their entirety under each of the Settlement Agreements, or for
any Breach by Seller of its Liabilities or obligations under any of the
Settlement Agreements (collectively, the "Settlement Losses").
8.4 Indemnification Procedures.
(a) In the event that any Legal Proceeding shall be instituted or any
claim or demand shall be asserted (individually and collectively, a "Claim") by
any Person in respect of which payment may be sought under this Article VIII
(regardless of the provisions of Section 8.3), the indemnified party shall
reasonably and promptly cause written notice (a "Claim Notice") of the assertion
of any Claim of which it has knowledge which is covered by this indemnity to be
delivered to the indemnifying party; provided, however, that the failure of the
indemnified party to give the Claim Notice shall not release, waive or otherwise
affect the indemnifying party's obligations with respect thereto, except to the
extent that the indemnifying party can demonstrate actual loss and material
prejudice as a result of such failure. If the indemnifying party shall notify
the indemnified party in writing within five (5) Business Days (or sooner, if
the nature of the Claim so requires) that the indemnifying party shall be
obligated under the terms of its indemnity hereunder in connection with such
lawsuit or action, then the indemnifying party shall be entitled, if it so
elects at its own cost, risk and expense, (i) to take control of the defense and
investigation of such lawsuit or action, (ii) to employ and engage attorneys of
its own choice, but, in any event, reasonably acceptable to the indemnified
party, to handle and defend the same unless the named parties to such action or
proceeding (including any impleaded parties) include both the indemnifying party
and the indemnified party and the indemnified party has been advised in writing
by counsel that there may be one or more material legal defenses available to
such indemnified party that are different from or additional to those available
to the indemnifying party, in which event the indemnified party shall be
entitled, at the indemnifying party's cost, risk and expense, to a single firm
of separate counsel (plus any necessary local counsel), all at reasonable cost,
of its own choosing, reasonably acceptable to the indemnifying party and (iii)
to compromise or settle such lawsuit or action, which compromise or settlement
shall be made only with the prior written consent of the indemnified party, such
consent not to be unreasonably withheld or delayed.
(b) If the indemnifying party elects not to defend against, negotiate,
settle or otherwise deal with any Claim which relates to any Losses indemnified
against hereunder, fails to notify the indemnified party of its election as
provided in this Section 8.4 or contests its
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obligation to indemnify the indemnified party for such Losses under this
Agreement, the indemnified party may defend against, negotiate, settle or
otherwise deal with such Claim. If the indemnified party defends any Claim, then
the indemnifying party shall reimburse the indemnified party for the Losses
incurred in defending such Claim upon submission of periodic bills. If the
indemnifying party shall assume the defense of any Claim, the indemnified party
may participate, at its own expense, in the defense of such Claim; provided,
however, that such indemnified party shall be entitled to participate in any
such defense with separate counsel at the expense of the indemnifying party if
(i) so requested by the indemnifying party to participate or (ii) in the
reasonable opinion of counsel to the indemnified party, a material conflict or
potential material conflict exists between the indemnified party and the
indemnifying party that would make such separate representation required; and
provided, further, that the indemnifying party shall not be required to pay for
more than one such counsel for all indemnified parties in connection with any
Claim. If the indemnifying party shall assume the defense of any Claim, the
indemnifying party shall obtain the prior written consent of the indemnified
party before entering into any settlement of such Claim or ceasing to defend
such Claim if, pursuant to or as a result of such settlement or cessation,
injunctive or other equitable relief shall be imposed against the indemnified
party or if such settlement or cessation does not expressly and unconditionally
release the indemnified party from all Liabilities or obligations with respect
to such Claim, with prejudice. The parties hereto agree to cooperate fully with
each other in connection with the defense, negotiation or settlement of any
Claim.
8.5 Product and Warranty Liability(a) . The provisions of this Article
VIII shall cover, without limitation, all Liabilities of whatever kind, nature
or description relating, directly or indirectly, to product liability,
litigation or claims against Buyer, SPD or Seller in connection with, arising
out of, or relating to products sold or shipped in connection with the Business.
8.6 Holdback.
(a) Notwithstanding anything to the contrary in this Agreement or in
any Ancillary Agreement (except for Section 8.6(d) hereof), and regardless of
other means of obtaining payment, at the Closing, Buyer shall withhold an amount
equal to Five Hundred Thousand Dollars ($500,000) of the Consideration (the
"Holdback Amount"), which shall payable to Buyer for any Losses incurred or that
Buyer may sustain in connection with, arising out of, resulting from or incident
to any Settlement Losses, at such time and in such manner as provided in this
Section 8.6.
(b) Buyer shall hold the Holdback Amount in accordance with this
Agreement and shall release the Holdback Amount only as follows: (i) the
Holdback Amount shall be paid immediately to Buyer's account in respect of any
Losses incurred or that Buyer may sustain in connection with, arising out of,
resulting from or incident to any Settlement Losses; and (ii) within fifteen
(15) Business Days after the Nova Completion Date, any Holdback Amount then
remaining and not paid or credited to Buyer in respect of any Settlement Losses,
or reserved in respect of any unresolved Settlement Losses, shall be released to
Seller. The Holdback Amount shall be maintained by Buyer in its own account
until the Nova Completion Date. To the extent it could be claimed that the
Holdback Amount is an asset of Seller, Seller hereby grants to Buyer, effective
upon the Closing, a security interest in the Holdback Amount as security for the
obligations of Seller to Buyer under this Section 8.6.
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(c) As used herein, the "Nova Completion Date" shall mean a date after
the date that Nova has accepted, or deemed accepted, the Modified Video
Explosion Software and Light Software pursuant to paragraphs 4(n) through 4(p)
of the Settlement Agreement or, if there is no acceptance or deemed acceptance
pursuant to such paragraphs, the date on which all disputes between Nova and
Seller are resolved pursuant to the Settlement Agreement which Buyer determines
in good faith and in its sole reasonable discretion., and there are no
outstanding issues with respect to the Settlement Losses.
(d) In the event the Nova Completion Date occurs prior to the Closing,
there shall be no Holdback Amount.
ARTICLE IX
MISCELLANEOUS
9.1 Publicity. No party to this Agreement shall issue any press
release or make any public announcement regarding the transactions contemplated
by this Agreement without the prior written approval of the other party;
provided, however, that Seller may issue any press release or make any public
announcement it believes in good faith is required by applicable Laws or any
listing or trading agreement concerning its publicly-traded securities so long
as Buyer has approved of such press release or public announcement in advance of
its being made (which approval shall not be unreasonably withheld or delayed).
9.2 Confidential Information. The parties acknowledge that the
transaction described in this Agreement is of a confidential nature and shall
not be disclosed except to Representatives and Affiliates, or as required by
Law, until such time as the parties make a public announcement regarding the
transaction as provided in Section 9.1. No party shall make any public
disclosure of the specific terms of this Agreement, except as required by Law.
In connection with the negotiation of this Agreement and preparation for the
consummation of the transactions contemplated hereby, each party acknowledges
that it will have access to confidential information relating to the other
party. Such confidential information shall be subject to the Confidentiality
Agreement and kept confidential. Notwithstanding anything to the contrary set
forth herein or in any other written or oral understanding or agreement to which
the parties hereto are parties or by which they are bound, the parties hereto
acknowledge and agree that any obligations of confidentiality contained herein
and therein shall not apply to the tax treatment and tax structure of the
transactions contemplated hereby upon the earlier to occur of (i) the date of
the public announcement of discussions relating to the transactions contemplated
hereby, (ii) the date of the public announcement of the transactions
contemplated hereby, or (iii) the Agreement Date, all within the meaning of
Treasury Regulations Section 1.6011-4; provided, however, that each party hereto
recognizes that the privilege each has to maintain, in its sole discretion, the
confidentiality of a communication relating to the transactions contemplated
hereby, including a confidential communication with its, his or her attorney or
a confidential communication with a federally authorized tax practitioner under
Section 7525 of the Code, is not intended to be affected by the foregoing.
9.3 Termination Events.
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(a) This Agreement may be terminated at any time prior to the Closing:
(i) by the mutual written agreement of Buyer and Seller;
(ii) by Buyer or Seller:
(A) on or after September 30, 2003, if the Closing shall not
have occurred by the close of business on such date, provided that such date
may, from time to time, be extended by either party (with written notice to the
other party) up to and including November 30, 2003, in the event that (1) the
Proxy Materials have not been cleared by the SEC, (2) any comments or requests
relating to the Proxy Materials by the SEC causes or necessitates a delay in (x)
the mailing of the Proxy Materials to Seller's stockholders, (y) the date of the
Stockholders Meeting, or (z) the consummation of the transactions contemplated
hereby, or (3) the conditions set forth in Section 7.1(b) or Section 7.2(a),
(b), (c), (e) or (g) have not been fully satisfied (such date, as it may be
extended, the "Outside Date"); and provided further, that the terminating or
extending party may not be in default of any of its obligations hereunder and
may not have caused the failure of the transactions contemplated by this
Agreement to have occurred on or before such date; or
(B) if there shall be in effect a final nonappealable Order
of a Governmental Body of competent jurisdiction restraining, enjoining or
otherwise prohibiting the consummation of the transactions contemplated hereby;
it being agreed that the parties hereto shall promptly appeal any adverse
determination which is appealable (and pursue such appeal with reasonable
diligence);
(iii) by Buyer if there is a breach of any representation or
warranty set forth in Article IV or any covenant or agreement to be
complied with or performed by Seller pursuant to the terms of this
Agreement and which breach (individually or in the aggregate) could
reasonably be expected to have a Condition-Related Material Adverse Effect
or the failure of a condition set forth in Section 7.2 to be satisfied (and
such condition is not waived in writing by Buyer) on or prior to the
Closing Date, or the occurrence of any event which results or would result
in the failure of a condition set forth in Section 7.2 to be satisfied on
or prior to the Closing Date, provided that Buyer may not terminate this
Agreement prior to the Closing if Seller has not had an adequate
opportunity to cure such failure; and, provided further, that
notwithstanding anything to the contrary contained herein, solely for
purposes of this Section 9.3(a)(iii) (and without affecting Section
9.3(a)(iv) or Section 7.2(a)) no effect shall be given to the materiality
and/or Material Adverse Affect/Material Adverse Change qualifiers contained
in any of the representations and warranties set forth in Article IV;
(iv) by Seller if there is a breach of any representation or
warranty set forth in Article V or of any covenant or agreement to be
complied with or performed by Buyer pursuant to the terms of this Agreement
and which breach (individually or in the aggregate) could reasonably be
expected to have a Condition-Related Material Adverse Effect or the failure
of a condition set forth in Section 7.1 to be satisfied (and such condition
is not waived in writing by Seller) on or prior to the Closing Date, or the
occurrence of any event which results or would result in the failure of a
condition set
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forth in Section 7.1 to be satisfied on or prior to the Closing Date;
provided that Seller may not terminate this Agreement prior to the Closing
Date if Buyer has not had an adequate opportunity to cure such failure and
provided further that notwithstanding anything to the contrary contained
herein, solely for purposes of this Section 9.3(a)(iv) (and without
affecting Section 9.3(a)(iii) or Section 7.2(a)) no effect shall be given
to the materiality and/or Material Adverse Affect/Material Adverse Change
qualifiers contained in any of the representations and warranties set forth
in Article V.
(v) by Buyer if: (A) Seller's Board of Directors shall have
withdrawn or adversely modified, or shall have resolved or determined to
withdraw or adversely modify, its recommendation that the stockholders of
Seller vote in favor of the approval of the transactions contemplated by
this Agreement; (B) Seller's Board of Directors shall have approved or
recommended, or shall have resolved or determined to approve or recommend,
to the stockholders of Seller, an Acquisition Proposal other than that
contemplated by this Agreement; (C) a tender offer or exchange offer that,
if successful, would result in any Person or group becoming a beneficial
owner of 20% or more of the outstanding shares of the capital stock of
Seller, is commenced (other than by Buyer or an Affiliate of Buyer) and
Seller's Board of Directors fails to recommend that the stockholders of
Seller not tender their shares in such tender or exchange offer; or (D) for
any reason Seller fails to call or hold the Stockholders Meeting by the
fifth (5th) day prior to the Outside Date;
(vi) by Seller if its Board of Directors determines to accept a
Superior Proposal, but only after Seller (A) shall not have obtained the
approval of the stockholders of Seller at the Stockholders Meeting duly
convened therefor (or at any adjournment or postponement thereof) at which
the required number of shares to approve the transactions contemplated by
this Agreement were present and entitled to vote and the vote to adopt and
approve this Agreement and the transactions contemplated herein is taken,
and (B) fulfills its obligations under Sections 9.3(d) and (e) hereof
concurrently with such termination;
(vii) By Buyer or Seller, if the approval of Seller's
stockholders shall not have been obtained at the Stockholders Meeting duly
convened therefor (or at any adjournment or postponement thereof) at which
the required number of shares to approve the transactions contemplated by
this Agreement were present and entitled to vote and the vote to adopt and
approve the transactions contemplated by this Agreement is taken.
(b) Upon the occurrence of any valid termination event set forth in
this Section 9.3, Buyer and/or Seller, as applicable, shall deliver written
notice to the non-terminating party. Upon delivery of such notice, this
Agreement shall terminate and the transfer of the Purchased Assets contemplated
hereby shall be deemed to have been abandoned without further action by Buyer or
Seller, subject to the making of any payments required by Sections 9.3(d) and
(e) below. Upon such termination, Buyer shall deliver or destroy all
confidential information regarding Seller in accordance with the Confidentiality
Agreement, Seller and each of its Subsidiaries shall deliver or destroy all
confidential information related to Buyer to which Seller or any of its
Subsidiaries had access in connection with the negotiation of this Agreement and
the consummation of the transactions contemplated hereby.
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(c) In the event that this Agreement is validly terminated as provided
in this Section 9.3, then each of the parties shall be relieved of their
respective duties and obligations arising under this Agreement after the date of
such termination and such termination shall be without Liability to Buyer or
Seller; provided, however, that nothing in this Section 9.3 shall relieve Buyer
or Seller of any Liability for any willful breach of this Agreement occurring
prior to the proper termination of this Agreement; provided, further, nothing in
this Section 9.3 shall (i) limit or expand any party's rights or obligations
related to the Good Faith Deposit as set forth in Section 2.4 or relieve Seller
of any liability for the payment of expenses and/or the termination fee pursuant
Sections 9.3(d) and (e) below.
(d) Seller and Buyer agree that if this Agreement is terminated
pursuant to Section 9.3(a)(v) or (vi), then Seller shall pay Buyer: (i) an
amount equal to the sum of Buyer's expenses, including, without limitation, (A)
all reasonable attorneys', accountants' and other professionals' fees, incurred
in connection with the negotiation and execution of the Original Agreement, this
Agreement and each other agreement, document and instrument contemplated by this
Agreement and the transactions contemplated hereby and thereby , and (B) all
Losses and all other amounts in connection with (1) any action taken by Buyer
(or any of its Affiliates or their respective Representatives) in connection
with enforcing or protecting its rights, benefits and/or privileges under this
Agreement or any Ancillary Agreement, or (2) any legal action, lawsuit, claim,
investigation, prosecution, enforcement, proceeding, defense, or settlement
relating to, arising out of or in connection with this Agreement or any
Ancillary Agreement (including, without limitation, attorneys' fees, court
costs, penalties, costs of litigation and costs for any appeals thereof),
regardless of which part(ies) have asserted, instituted or filed any of the
foregoing (collectively, the "Buyer's Expenses"); and (ii) a termination fee of
Nine Hundred Fifty Thousand Dollars ($950,000) (the "Termination Fee").
(e) Seller and Buyer agree that if (i) this Agreement is terminated
pursuant to Sections 9.3(a) (vii) and, at any time after the Agreement Date and
before the vote on this Agreement and the transactions contemplated hereby at
the Stockholders Meeting, an Acquisition Proposal has been publicly announced
and not expressly and publicly withdrawn, and (ii) either a Competing
Transaction is consummated or Seller enters into a definitive agreement with
respect to a Competing Transaction, in either case, within twelve (12) months
following termination of this Agreement, then Seller shall pay Buyer the
Termination Fee and the Buyer's Expenses.
(f) In the event of a termination by Seller pursuant to Section
9.3(a)(vi), the payment of the Termination Fee shall be a condition precedent to
the effectiveness of such termination and shall be made concurrently with the
delivery by Seller of the notice of termination in accordance with Section
9.3(b) hereof, which notice of termination shall contain an express undertaking
by Seller (or any successor thereof) to pay the Buyer's Expenses in accordance
with the terms of this Agreement.
(g) In the event of a termination by Buyer pursuant to Section
9.3(a)(v), the payment of the Termination Fee shall be made within two (2)
Business Days of the date on which Buyer delivers the notice of termination in
accordance with Section 9.3(b) hereof. In the event of a termination by Buyer
pursuant to Section 9.3(a)(vii) where the conditions described in Section 9.3(e)
are met, (i) the payment by Seller of the Termination Fee shall be made within
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two (2) Business Days of the date on which the conditions described in Section
9.3(e) are met and (ii) Seller shall pay the Buyer's Expenses not later than two
(2) Business Days after delivery to Seller of notice of demand for payment and a
documented itemization setting forth in reasonable detail all expenses of Buyer
for which it is entitled to receive payment (which itemization may be
supplemented and updated by Buyer from time to time until the 90th day after it
delivers such notice of demand for payment).
(h) In the event of any termination in of this Agreement pursuant to
Section 9.3(a)(v), or (vi), Seller shall pay the Buyer's Expenses not later than
two (2) Business Days after delivery to Seller of notice of demand for payment
and a documented itemization setting forth in reasonable detail all expenses of
Buyer for which it is entitled to receive payment (which itemization may be
supplemented and updated by Buyer from time to time until the 90th day after it
delivers such notice of demand for payment).
(i) All payments under this Section 9.3 shall be made by wire transfer
of immediately available funds to an account designated by the party entitled to
receive payment therefor.
9.4 Expenses. Except as otherwise provided in this Agreement, Seller,
on one hand, and Buyer, on the other hand, shall each bear its own expenses,
including attorneys', accountants' and other professionals' fees, incurred in
connection with the negotiation and execution of the Original Agreement, this
Agreement and each other agreement, document and instrument contemplated by this
Agreement and the consummation of the transactions contemplated hereby and
thereby. Without limiting the generality of the foregoing, Seller shall pay all
the expenses related to the preparation, printing, filing and mailing of the
Proxy Materials and/or proxy solicitation, and all SEC and other regulatory
filing fees incurred in connection with the Proxy Materials.
9.5 Specific Performance. Seller and Buyer acknowledge and agree that
the Breach of this Agreement by a party would cause irreparable damage to the
other and that the non-breaching party may not have an adequate remedy at law.
Therefore, the obligations of Seller and Buyer under this Agreement, including,
without limitation, Seller's obligation to transfer the Purchased Assets to
Buyer and Buyer's obligation to purchase the Purchased Assets from Seller, shall
be enforceable by a decree of specific performance issued by any court of
competent jurisdiction, and appropriate injunctive relief may be applied for and
granted in connection therewith. Such remedies shall, however, be cumulative and
not exclusive and shall be in addition to any other remedies which any party may
have under this Agreement or otherwise.
9.6 Legal Proceedings; Arbitration. Except for in connection with the
remedy of specific performance, parties agree that any and all disputes or
controversies of any nature between them arising at any time, shall be
determined by binding arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association ("AAA") before a single neutral
arbitrator ("Arbitrator"). The Arbitrator shall be an attorney or retired judge
with at least ten (10) years experience in the software industry and shall be
mutually agreed upon by Buyer and Seller. If Buyer and Seller are unable to
agree on an Arbitrator, the Arbitrator shall be appointed by the AAA. The fees
of the Arbitrator shall be borne equally by Buyer and Seller,
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provided that the Arbitrator may require that such fees be borne in such other
manner as the Arbitrator determines is required in order for this arbitration
clause to be enforceable under applicable law. The parties shall be entitled to
conduct discovery in accordance with Section 1283.05 of the California Code of
Civil Procedure, provided that (i) the Arbitrator must authorize such all
discovery in advance based on findings that the material sought is relevant to
the issues in dispute and that the nature and scope of such discovery is
reasonable under the circumstances, and (ii) discovery shall be limited to
depositions and production of documents unless the Arbitrator finds that another
method of discovery (e.g., interrogatories) is the most reasonable and cost
efficient method of obtaining the information sought. There shall be a record of
the proceedings at the arbitration hearing and the Arbitrator shall issue a
statement of decision setting forth the factual and legal basis for the
Arbitrator's decision. If neither party gives written notice requesting an
appeal within ten (10) Business Days after the issuance of the statement of
decision, the Arbitrator's decision shall be final and binding as to all matters
of substance and procedure, and may be enforced by a petition to the California
Superior Court, which may be made ex parte, for confirmation and enforcement of
the award. If either party gives written notice requesting an appeal within ten
(10) Business Days after the issuance of the statement of decision, the award of
the Arbitrator shall be appealed to three (3) neutral arbitrators (the
"Appellate Arbitrators"), each of whom shall have the same qualifications and be
selected through the same procedure as the Arbitrator. The appealing party shall
file its appellate brief within thirty (30) days after its written notice
requesting the appeal and the other party shall file its brief within thirty
(30) days thereafter. The Appellate Arbitrators shall thereupon review the
decision of the Arbitrator applying the same standards of review and all of the
same presumptions) as if the Appellate Arbitrators were a California Court of
Appeals reviewing a judgment of the California Superior Court, except that the
Appellate Arbitrators shall in all cases issue a final award and shall not
remand the matter to the Arbitrator. The decision of the Appellate Arbitrators
shall be final and binding as to all matters of substance and procedure, and may
be enforced by a petition to the California Superior Court, which may be made ex
parte, for confirmation and enforcement of the award. The party appealing the
decision of the Arbitrator shall pay all costs and expenses of the appeal,
including the fees of the Appellate Arbitrators and the reasonable outside
attorneys' fees of the opposing party, unless the decision of the Arbitrator is
reversed, in which event the expenses of the appeal shall be borne as determined
by the Appellate Arbitrators. The Arbitrator shall have the power to enter
temporary restraining orders, preliminary and permanent injunctions. Prior to
the appointment of the Arbitrator or for remedies beyond the jurisdiction of an
arbitrator, at any time, Buyer may seek pendente lite relief in a court of
competent jurisdiction in Los Angeles County, California without thereby waiving
its right to arbitration of the dispute or controversy under this Section 9.6.
All arbitration proceedings (including proceedings before the Appellate
Arbitrators) shall be closed to the public and confidential and all records
relating thereto shall be permanently sealed, except as necessary to obtain
court confirmation of the arbitration award. The provisions of this Section 9.6
shall supersede any inconsistent provisions of any prior agreement between the
parties.
9.7 Waiver of Jury Trial. Each party hereto hereby expressly waives
any right to trial by jury of any claim, demand, action or cause of action
arising under or in connection with this Agreement or the transactions
contemplated hereby.
9.8 Entire Agreement; Amendments and Waivers. This Agreement,
including the schedules and exhibits hereto and together with the
Confidentiality Agreement and the
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Ancillary Agreements, represents the entire understanding and agreement between
the parties hereto with respect to the subject matter hereof and can be amended,
supplemented or changed, and any provision hereof can be waived, only by written
instrument making specific reference to this Agreement signed by the party
against whom enforcement of any such amendment, supplement, modification or
waiver is sought. No action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall be deemed to
constitute a waiver by the party taking such action of compliance with, nor
shall it diminish or obviate in any way, any representation, warranty, covenant
or agreement contained herein or in any Ancillary Agreement. The waiver by any
party hereto of a Breach of any provision of this Agreement shall not operate or
be construed as a further or continuing waiver of such Breach or as a waiver of
any other or subsequent Breach. No failure on the part of any party to exercise,
and no delay in exercising, any right, power or remedy hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of such right,
power or remedy by such party preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. All remedies hereunder are
cumulative and are not exclusive of any other remedies provided by law. No
supplement, modification or waiver of this Agreement shall be binding unless
executed in writing by the party to be bound thereby. Notwithstanding anything
to the contrary herein, the parties hereto reserve and retain all rights and
remedies under, relating to or with respect to the Original Agreement including
any conduct preceding the Amendment Date. In particular, but without limitation,
each of the parties hereto agrees and acknowledges that the execution of this
Agreement shall not in any way: (i) limit any obligations of the parties hereto
under the Original Agreement; (ii) constitute a waiver of any Breach of the
provisions of the Original Agreement by any party hereto; (iii) excuse any
Breach of the Original Agreement that occurred prior to the Amendment Date; or
(iv) derogate or limit any rights or remedies of the parties hereto pursuant to
the Original Agreement and applicable Law.
9.9 Governing Law. This Agreement shall be construed, interpreted and
the rights of the parties determined in accordance with the laws of the State of
California, without reference to principles of conflicts of laws.
9.10 Headings. The titles, captions or headings of the Articles and
Sections herein are for convenience of reference only and are not intended to be
a part of or to affect or restrict the meaning or interpretation of this
Agreement.
9.11 Notices. All notices, requests, approvals, consents, demands,
claims and other communications required or permitted to be given under this
Agreement shall be in writing and shall be served personally, or sent by a
national overnight delivery or courier company, or by U.S. registered or
certified mail, postage prepaid, return receipt requested, and addressed as
follows:
If to Buyer, to:
c/o Sony Pictures Digital Inc.
6025 W. Slauson Ave.
Culver City, California, 90231
Attention: Senior Vice President, Business and Legal Affairs
Telecopier: (310) 482-4910
74
If to Seller, to:
1617 Sherman Avenue
Madison, Wisconsin 53704
Attention: Chief Financial Officer
Telecopier: (608) 204-8807
with a copy to:
McBreen & Kopko
20 N. Wacker Drive, Suite 2520
Chicago, Illinois 60606
Attention: Frederick H. Kopko, Jr.
Telecopier: (312) 332-2657
Any such notices shall be deemed delivered upon delivery or refusal to accept
delivery as indicated in writing by the Person attempting to make personal
service, on the U.S. Postal Service return receipt, or by similar written advice
from the overnight delivery company; provided, however, that if any such notice
shall also be sent by electronic transmission device, such as telex, telecopy,
fax machine or computer to the fax number set forth above, such notice shall be
deemed given at the time and on the date of machine transmittal (except if sent
after 5:00 p.m. recipient's time, in which case the notice shall be deemed given
at 9:00 a.m. on the next Business Day) if the sending party receives a written
send verification on its machine and sends a duplicate notice on the same day or
the next Business Day by personal service, registered or certified U.S. mail, or
overnight delivery in the manner described above. Each party hereto shall make
an ordinary, good faith effort to ensure that it will accept or receive notices
that are given in accordance with this Section 9.11, and that any Person to be
given notice actually receives such notice. Any party to whom notices are to be
sent pursuant to this Agreement may from time to time change its address and/or
facsimile number for future communication hereunder by giving notice in the
manner prescribed herein to all other parties hereto, provided that the address
and/or facsimile number change shall not be effective until five (5) Business
Days after the notice of change has been given.
9.12 Severability. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
9.13 Binding Effect; Third Party Beneficiaries; Assignment. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. Nothing in this Agreement
shall create or be deemed to create any rights as third party beneficiaries to
this Agreement in any Person not a party to this Agreement, except as provided
below; provided, however, that any Person that is not a party to this Agreement
but, by the terms of Section 8.2, is entitled to indemnification, shall be
considered a third party
75
beneficiary of this Agreement, with full rights of enforcement as though such
Person was a signatory to this Agreement. No assignment of this Agreement or of
any rights or obligations hereunder may be made by either Seller or Buyer (by
operation of law or otherwise) without the prior written consent of the other
party hereto and any attempted assignment without the required consent shall be
void; provided, however, that Buyer may assign this Agreement and any or all
rights or obligations hereunder (including, without limitation, Buyer's rights
to acquire the Purchased Assets and Buyer's rights to seek indemnification in
accordance with Article VIII) to any Affiliate of Buyer. Upon any such permitted
assignment, unless the context otherwise requires, the references in this
Agreement to Buyer shall also apply to any such assignee; provided, however,
that Buyer shall nevertheless remain primarily liable for its obligations under
this Agreement.
9.14 Attorneys' Fees and Costs. In the event of any action at law or
in equity between the parties hereto to enforce any of the provisions hereof,
the unsuccessful party to such litigation shall pay to the successful party all
costs and expenses, including reasonable attorneys' fees, incurred therein by
such successful party; and if such successful party shall recover judgment in
any such action or proceeding, such costs, expenses and reasonable attorneys'
fees may be included in and as part of such judgment. The successful party shall
be the party who is entitled to recover its costs of suit, whether or not the
suit proceeds to final judgment. A party not entitled to recover its costs shall
not recover attorneys' fees.
9.15 Liquidated Damages.
(a) Notwithstanding anything to the contrary herein, in the event that
(i) Seller intentionally or knowingly materially breaches Section 6.1 (Further
Assurances), 6.2 (Conduct of Business) or 6.3 (Stockholders Meeting; Proxy
Statement) of this Agreement and such material breach is intended, or Seller
knew such material breach was reasonably likely to cause (either in whole or in
part) the transactions contemplated by this Agreement (A) not to be consummated
(B) not to be able to be consummated or (C) to be delayed through the Outside
Date or (ii) Seller materially breaches Section 6.11 (No-Shop Clause) of this
Agreement (each of the events described in clause (i) and clause (ii) above is
an "LDC Trigger"), the parties hereto agree and acknowledge that, based upon the
nature of the transaction and other surrounding circumstances, it would be both
impracticable and extremely difficult to fix the amount of actual damages that
Buyer would suffer. The parties hereto agree and acknowledge that, based upon
their separate consideration and analysis of the matter, a reasonable estimate
of such damages, including damages for lost profits and other consequential
damages, would be equal to or exceed Five Million Dollars ($5,000,000).
Accordingly, Seller agrees that in the event that Seller is adjudicated (whether
in a court of competent jurisdiction or in a proceeding pursuant to Section 9.6
hereof) to have committed an LDC Trigger (i.e., an LDC Trigger is determined,
after adjudication, to have occurred), Seller shall be liable to Buyer for
liquidated monetary damages in the amount of Five Million Dollars ($5,000.000)
(the "Liquidated Damages"). Notwithstanding anything to the contrary contained
in this Section 9.15(a), a breach of Section 6.11(c) shall not be an LDC Trigger
where the breach is Seller's failure to notify Buyer of Seller's receipt of any
inquiry, information request or other proposal pursuant to Section 6.11(c), to
the extent that such inquiry, information request or other proposal was not, at
any time, received by, or communicated to, an officer, director, attorney or
advisor of Seller, or another
76
Representative of Seller with authority to act (whether by response,
negotiation, or otherwise) on such inquiry, request or proposal.
(b) The parties hereto acknowledge and agree that the Liquidated
Damages set forth in Section 9.15(a) is a reasonable forecast and estimate of
the damages Buyer is likely to suffer as a result of such breach by Seller,
considering all of the circumstances existing on the Amendment Date, including,
without limitation, damages flowing from lost future profits, business
opportunities and foreseeable, consequential damages that would be suffered by
Buyer. The parties hereto have specifically negotiated this provision at arms
length, and have mutually determined that the amount of the Liquidated Damages
set forth herein is a reasonable estimate of damages, and not a penalty of any
kind. Seller represents and warrants to Buyer that it has conducted its own
separate review and analysis of the matters set forth in this Section 9.15,
including with respect to the amount of the Liquidated Damages.
(c) The parties hereto further acknowledge and agree that the payment
of the Liquidated Damages shall not be construed as a release or waiver by Buyer
of the right to prevent the continuation of any such breach of this Agreement in
equity or otherwise, nor shall it preclude or be construed to preclude Buyer
from making a showing of irreparable injury or any other element that may be
necessary to secure injunctive relief. Buyer's right to recover the Liquidated
Damages shall be in addition to and without limitation or derogation of any
non-monetary remedies in Law or in equity that may be available to Buyer for the
breach of this Agreement or any Ancillary Agreement, including, but not limited
to, injunctive, equitable or any other relief to which Buyer is otherwise
entitled under this Agreement, any Ancillary Agreement or applicable Law.
(d) All payments under this Section 9.15 shall be made by wire
transfer of immediately available funds to an account designated by Buyer.
(e) This Section 9.15 shall terminate and be of no further force and
effect upon the consummation of the transactions contemplated by this Agreement.
9.16 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.17 Representation by Counsel. Each party hereto represents and
agrees with each other that it has been represented by or had the opportunity to
be represented by, independent counsel of its own choosing, and that it has had
the full right and opportunity to consult with its respective attorney(s), that
to the extent, if any, that it desired, it availed itself of this right and
opportunity, that it or its authorized officers (as the case may be) have
carefully read and fully understand this Agreement in its entirety and have had
it fully explained to them by such party's respective counsel, that each is
fully aware of the contents thereof and its meaning, intent and legal effect,
and that it or its authorized officer (as the case may be) is competent to
execute this Agreement and has executed this Agreement free from coercion,
duress or undue influence.
77
9.18 Schedules. In the event of any inconsistency between the
statements in the body of this Agreement and those in the Disclosure Schedule
(other than an exception expressly set forth as such in the Disclosure Schedule
with respect to a specifically identified representation or warranty), the
statements in the body of this Agreement will control.
9.19 No Interpretation Against Drafter. This Agreement is the product
of negotiations between the parties hereto represented by counsel and any rules
of construction relating to interpretation against the drafter of an agreement
shall not apply to this Agreement and are expressly waived.
(signature page follows)
78
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement, or has caused this Agreement to be duly executed on its respective
behalf by its respective officer(s) thereunto duly authorized, as of the day and
year first above written.
"Buyer"
SP SOFTWARE ACQUISITION COMPANY
By:
-----------------------------------------
Name:
Title:
"Seller"
SONIC FOUNDRY, INC.
By:
-----------------------------------------
Name:
Title:
ACCEPTED ACKNOWLEDGED AND AGREED
WITH RESPECT TO SECTION 2.4 AND
ARTICLE VIII ONLY:
"SPD"
SONY PICTURES DIGITAL INC.
By:
--------------------------------
Name:
Title:
S-1
LIST OF EXHIBITS AND ANNEXES
Annexes
Annex I............................... Year End Financial Statements
Annex II.............................. Interim Financial Statements
Exhibits
Exhibit A............................. Assignment of Contract Rights
Exhibit B............................. Assignment of Leases
Exhibit C-1........................... Assignment of Copyrights
Exhibit C-2........................... Assignment of Trademarks
Exhibit C-3........................... Assignment of Patents
Exhibit C-4........................... Assignment of Domain Names
Exhibit D............................. Assumption Agreement
Exhibit E............................. Bill of Sale
Exhibit F............................. Escrow Agreement
Exhibit G-1........................... Form of Employment Agreement
Exhibit G-2........................... Employee Lists
Exhibit H-1........................... Non-Competition Agreement (Seller)
Exhibit H-2........................... Non-Competition Agreement (Individuals)
Exhibit I............................. Transition Services Agreement
Exhibit J............................. Allocation
Exhibit K............................. Opinion of Seller's Counsel
Exhibit L............................. Trademark License Agreement
Exhibit M............................. Fairness Opinion
Exhibit N............................. Voting Agreement
Exhibit O............................. MediaSite Agreement
[LOGO] Silverwood Partners
April 26, 2003
The Board of Directors
Sonic Foundry, Inc.
1617 Sherman Avenue
Madison, WI 53704
Dear Sirs:
You have asked Silverwood Partners LLC ("Silverwood Partners") to advise the
Board of Directors with respect to the fairness to Sonic Foundry, Inc. (the
"Company"), from a financial point of view, of the consideration to be received
by the Company pursuant to the terms of the Asset Purchase Agreement (the "Asset
Purchase Agreement") between Sony Pictures Digital Inc. ("SPD"), and the
Company, in connection with the sale of the Company's Desktop Software business
(the "Desktop Software Business").
The Asset Purchase Agreement provides for the sale (the "Sale") of certain
assets and the transfer of certain liabilities of the Desktop Software Business
to SP Software Acquisition Company, a wholly-owned subsidiary of SPD. The
Company will receive as consideration at closing a cash payment of Eighteen
Million Dollars ($18,000,000) and SPD has also agreed to forgive approximately
$135,000 due to SPD by the Company in connection with the settlement of certain
litigation with Nova Development Corporation.
In arriving at our opinion, we have reviewed the substantially final draft of
the Asset Purchase Agreement attached hereto, dated April 25, 2003, and certain
publicly available business and financial information relating to the Company
and the Desktop Software Business. We have also reviewed certain other
information, including financial forecasts, provided to us by the Company, and
have met with management of the Company and the Desktop Software Business to
discuss the business and prospects of the Desktop Software Business. In
connection with our engagement, we approached third parties to solicit
indications of interest in a possible acquisition of the Desktop Software
Business and held discussions with certain of these parties prior to the date
hereof.
We have also considered certain financial data of the Desktop Software Business,
and we have compared that data with similar data for publicly held companies in
businesses similar to those of the Desktop Software Business. We have also
considered the financial terms of certain other business combinations and other
transactions which have recently been effected and such other information,
financial studies, analyses and investigations and financial, economic and
market criteria which we deemed relevant.
--------------------------------------------------------------------------------
Silverwood Partners
Charles River Court, 8 Pleasant Street, South Natick, MA 01760
Tel: 508.651.2194 . Fax: 508.651.9590
www.silverwoodpartners.com
Member NASD and SIPC
The Board of Directors
Sonic Foundry, Inc.
Fairness Opinion - Desktop Software Business
April 26, 2003
Page 2.
We have also considered the financial condition of the Company and the opinion
of the Company's auditors for the fiscal year ended September 30, 2002 in which
it was stated that due to the Company's working capital deficiency, its
convertible debt obligations, and its lack of long-term credit availability,
there is "substantial doubt" about the Company's ability to continue as a going
concern. Further, we have given consideration to the Company's ongoing
negotiations with its convertible debt holders with respect to the Company's
default on the covenants of related financing agreements. The opinion expressed
herein is being rendered during a period of unusual volatility in the financial
markets and at a time when there is a material level of geopolitical instability
(i) in the Middle East in the aftermath of the war with Iraq, and (ii) in Asia
in connection with North Korea's stated plans for the development of nuclear
weapons. The opinion expressed herein is necessarily subject to the absence of
further material developments in the financial, economic and market conditions
from those prevailing on the date hereof.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information (including the
information provided to Silverwood Partners in respect of the Desktop Software
Business) and we have relied on its being complete and accurate in all material
respects. With respect to the financial forecasts, we have assumed at the
Company's direction that they have been reasonably prepared on bases reflecting
the best currently available estimates and judgments of the Company's management
as to the future financial performance of the Desktop Software Business. In
addition, we have not made an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of the Desktop Software Business, nor
have we been furnished with any such evaluations or appraisals. We have not been
requested to opine as to, and our opinion does not in any manner address, the
Company's underlying business decision to effect the sale of the Desktop
Software Business.
It should be noted that this opinion is based on interest rates and market
conditions prevailing, and other circumstances and conditions existing, as of
the date hereof, and this opinion does not represent our opinion as to what the
value of the Desktop Software Business actually will be upon the consummation of
the Sale. Such actual value of the Desktop Software Business could be higher or
lower than the value as of the date hereof depending upon changes in such
interest rates, market conditions, general economic conditions and other factors
which generally influence the value of companies or businesses. Although
subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm the opinion. Furthermore, any valuation of a
company or business is only an approximation, subject to uncertainties and
contingencies all of which are difficult to predict and beyond the control of
the firm preparing such valuation.
As a registered broker-dealer and member of the NASD, Silverwood Partners is
regularly engaged in the valuations of businesses and securities in connection
with acquisitions, mergers and private placements, and valuations for other
purposes.
The Board of Directors
Sonic Foundry, Inc.
Fairness Opinion - Desktop Software Business
April 26, 2003
Page 3.
We have acted as financial advisor to the Company in connection with the sale of
the Desktop Software Business and will receive a fee for our services, a
substantial portion of which is contingent upon the consummation of the Sale. We
will also receive a fee for rendering this opinion.
Silverwood Partners has within the past 12 months been engaged by the Company
(i) to provide a capability assessment report in connection with certain
litigation between the Company and the former owners of a constituent business
within the Company's Media Services Business, (ii) to provide a review of
strategic alternatives for use by the Company's management and Board of
Directors in evaluating alternative approaches for maximizing shareholder value,
(iii) to prepare a valuation of the Company's Media Systems business for use by
the Company in determining whether the goodwill associated with such business
had been impaired as of September 30, 2002, and (iv) to act as the Company's
financial advisor and render an opinion as to the fairness, from a financial
point of view, of the consideration to be received by the Company pursuant to
the terms of an asset purchase agreement between the Company and the prospective
purchaser of the Company's Media Services Division.
It is understood that this letter is for the information of the Board of
Directors of the Company only in connection with its consideration of the Sale
and is not to be reproduced, disseminated, quoted or referred to, in whole or in
part, in any registration statement, prospectus or proxy statement, or in any
other document, nor shall this letter be used for any other purposes, without
the prior written consent of Silverwood Partners.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the consideration to be received by the Company in connection with the
sale of the Desktop Software Business is fair to the Company from a financial
point of view.
Very truly yours,
SILVERWOOD PARTNERS LLC
By:
-------------------------
Jonathan Hodson-Walker
Managing Partner
SONIC FOUNDRY, INC.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF SONIC FOUNDRY, INC.
The undersigned stockholder of Sonic Foundry, Inc., a Maryland corporation
(the "Company"), hereby appoints R. Buinevicius and K. Minor, or either of them,
as proxies for the undersigned, with full power of substitution in each of them,
to attend the Annual Meeting of the Stockholders of the Company to be held at
the Monona Terrace Community and Convention Center, One John Nolen Drive,
Madison, Wisconsin 53703 on July 3, 2003, at 9:00 a.m., local time, and any
adjournment or postponement thereof, to cast on behalf of the undersigned all
votes that the undersigned is entitled to cast at such meeting and otherwise to
represent the undersigned at the meeting with all powers possessed by the
undersigned if personally present at the meeting. The undersigned hereby
acknowledges receipt of the Notice of the Annual Meeting of Stockholders and of
the accompanying Proxy Statement and revokes any proxy heretofore given with
respect to such meeting.
The votes entitled to be cast by the undersigned will be cast as instructed
below. If this Proxy is executed but no instruction is given, the votes entitled
to be cast by the undersigned will be cast "for" each of the proposals as
described in the Proxy Statement and in the discretion of the Proxy holder on
any other matter that may properly come before the meeting or any adjournment or
postponement thereof.
1. Approval of the sale of the Desktop Software Business of the Company
pursuant to the Asset Purchase Agreement, which constitutes a sale of
substantially all of the assets of Sonic pursuant to MGCL as described in
the accompanying Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of the grant of discretionary authority to the Company's Board of
Directors to effect a reverse stock split of Sonic's common stock in the
ratio of one-for-ten, as described in the accompanying Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Election of one director to hold office for a term of five years, as
described in the accompanying Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Ratification of the appointment of Ernst & Young LLP as the independent
auditors of the Company for the fiscal year ending September 30, 2003, as
described in the accompanying Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Please sign exactly as name appears on the records of the Company and date. If
the shares are held jointly, each holder should sign. When signing as an
attorney, executor, administrator, trustee, guardian, officer of a corporation
or other entity or in another representative capacity, please give the full
title under signature(s).
-------------------------------------
Signature
-------------------------------------
Signature, if held jointly
Dated: , 2003
-------------